TMI Blog2007 (3) TMI 770X X X X Extracts X X X X X X X X Extracts X X X X ..... see is having interest free funds and the same was deployed in infrastructure loans yielding Tax Free Income under sec.10(23G). No interest bearing loan was used to make investment in Tax Free Bonds. He further submitted that interest free own funds were used for the purpose of earning the income exempt from tax and no interest expenditure can be said to have been incurred specifically for the purpose of earning the exempted income. He relied on the judgment of Hon'ble Madras High Court in the case of CIT v. Hotel Savera (239 ITR 795). 4. The learned Counsel for the Assessee further relied on the judgment of Hon'ble Calcutta High Court in the case of CIT v. Tingri Tea Company (79 ITR 294); the decision of the Mumbai Bench of the Tribunal in the case of Grasim Industries Ltd. v. DCIT (64 TTJ 357) and in the case of ACIT v. Eicher Ltd., (101 TTJ 369) and submitted that Sec. 14A gives the AO the power to disallow expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The precise question that arises for consideration is whether it is necessary for the AO to show on the basis of the material on record that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure which was incurred by the assessee to produce non-taxable income. The word incurred signifies that the expenditure must have been actually incurred, not notionally. 5. The learned Counsel for the Assessee further submitted that if any expenditure is actually incurred for the purpose of earning exempted income, it has to be disallowed. For this purpose he relied on the decision of the Tribunal in the case of ACIT v. Eicher Ltd., (101 TTJ 369) (supra). He vehemently argued that, on this issue the ratio laid down by several Courts including the Supreme Court is that where the borrowings are for a general purpose of the assessee's business or investments and it is not possible to allocate a borrowing to any particular investment, no part of the interest can be disallowed or deducted from the interest on tax-free securities. I further, where an assessee carries on an indivisible business and a part of its profits are not liable to tax, the entire expenditure incurred for the purpose of the business should be allowed, although a part of the expense may have been incurred for earning the non-taxable profits. For this purpose, he relied on the following case law: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Counsel for the Assessee contended that as there is no nexus between the income and the expenditure, nor do the facts, as set-out above, establish one, no expenditure can be said to have been incurred in relation to the earning of any exempt income. 7. He further argued that it is important to note that the total investment in tax free securities as on 31.3.2000, is worth ₹ 775 crores, as against the Capital and Reserves of the Company worth ₹ 1391 crores. The capital and Reserves exceed the investment in such securities. Therefore, all the aforesaid securities have been invested out of the Capital and Reserves of the Company and not out of the loans taken for the the business of the Company. For this proposition, he placed reliance on the following judgments:- (i) CIT v. Hotel Savera, 239 ITR 795 (Mad.) In this case, the firm paid interest on borrowed capital. An amount was lent by the firm to a private limited company. The amount borrowed by the firm was mixed with its own funds. The ITO disallowed part of interest relation to the amount lent to the private limited company, as no interest was charged on the same. The Tribunal found that the total amount i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s right in holding that the income-tax authorities were not justified in disallowing any part of the bank's interest on the overdrafts. (iii) Torrent Franchisers v. ACIT, 73 ITJ p. 624 (Ahd.-T) In this case, the interest was paid on borrowed capital. The assessee engaged in the business of financing, did not charge Interest from certain parties. The assessee had adequate interest free funds. The ITO disallowed interest in respect of interest-free advance. The Tribunal held that entire interest free funds available with the assessee are to be considered and if the total interest-free advances including debit balance of Partners of the assessee firm, do not exceed the total interest-free funds available with the assessee, no interest is disallowable on account of utilization of funds for non-business purposes. (iv) Rasiklal B. Shah v. ITO, 112 Taxman (Mag.), p.187 (Mum.-T) In this case, the firm paid interest on borrowed funds and the payments were made to the partners for purchase of property. It was held that since partners had sufficient credit balance in their Capital Account, payments made to them for purchase of properly, could be considered as withdrawa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. The learned Departmental Representative, on the contrary, submitted that the Assessee must have incurred expenditure to earn this exempted income and the expenditure incurred to earn this exempted income has to be disallowed. The CIT(Appeals) was very reasonable to disallow 10% of the exempted interest income as expenditure attributable to this income. Accordingly, he prayed that the order of the CIT(Appeals) on this issue may be sustained. He placed reliance on the judgment of the Hon'ble Jurisdictional High Court in the case of K. Somasundaram and Bros. V. CIT (238 ITR 939) wherein it was held that :- The amount lent, according to the Assessee, came out of the contract earnings. The amount borrowed, according to the Assessee, was invested in the execution of the contracts. It was clear, therefore, that the Assessee had invested the borrowed funds in the execution of the contracts, had recouped the money so invested presumably with profits as well on executing the contract.; The amount realized on the execution thus included the amount which the Assessee had borrowed and invested. When the Assessee decided to lend a substantial part of those funds interest free to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005 : The first ground in this appeal of the Revenue is that that CIT(Appeals) erred in directing the Assessing Officer to exempt penal interest under sec.10(23G) of the I.T. Act. After hearing the rival parties and carefully going through the material placed before us, we find no infirmity in the order of the CIT(Appeals) on this issue. The penal interest is nothing but interest for default. In our considered opinion, it is exempt under sec.10(23G) of the Act. Accordingly, we confirm the order of the CIT(Appeals) on this issue and reject the ground taken by the Revenue. 15. One more ground in this appeal is that the CIT(Appeals) erred in restricting the estimated disallowance on expenses attributable to exempted income. We have considered similar issue in the Assessee's appeal in ITA No.747/Mds/05 as above, wherein we have set aside this issue to the file of the Assessing Officer with a direction to disallow only the actual expenditure incurred for earning the Interest free income. Accordingly, in this case also, we remit the matter to the file of the Assessing Officer with similar direction. 16. This appeal of the Revenue is partly allowed for statistical purpose. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Borrower and the Lenders); c. negotiate with the banks and financial institutions (on behalf of the project company) to he up the loans. The Assessing Officer held Debt Syndication Fees of ₹ 12,50,000/- is not eligible for exemption under section 10(23G) of the Act on the ground that such service are not arising or accruing in the course of lending of its own money to the borrower. The learned Counsel for the Assessee vehemently argued that the Assessing Officer failed to appreciate that the services are provided to the borrower for raising money are in the nature of service fees for the money borrowed as referred to in the definition of interest under Section 2(28A) of the Act. He reiterated the interpretation of definition of the term interest under section 2(28A) as held by the Hon'ble Madras High Court in the case of Viswapriya Financial Services and Securities Ltd. vs. CIT (supra) that even amounts payable in transactions where money has not been borrowed and debt has not been incurred are brought within the scope of the term interest. Conclusively he contended that the Debt Syndication fees of ₹ 12,50,000/- is eligible for exemption under section 10(23G) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprise or undertaking engaged in the business referred to in the sub section. He further submitted that the Liquidated Damages are paid by defaulting persons for default in payment of money and it is a compensation for loss of profit any, therefore, the Liquidated Damages cannot be treated as interest. 22. We have heard the rival submissions and perused the material on record. The Assessee has received liquidated damages by way of compensation as stipulated in the agreement for default in payment of bills. The right to receive Liquidated Damages accrue on account of default in the payment of bills as stipulated in the agreement and it did not arise on account of any delay in the payment of loan. Hence, it cannot be construed as interest to attract the provisions of sec.10(23G) of the Act. Accordingly, we up hold the order of the CIT(Appeals) on this issue and reject the ground taken by the Assessee. 23. Regarding Debt Syndication Fees, the learned Departmental Representative drew our attention to sec.2(28A) which reads as under :- ' interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso entitled for deduction under sec.36(1)(viii) of an amount not exceeding 40% of the profit derived from business for providing long finance, before making any deduction under this clause. The Assessee computed deduction under sec.36(vii)(a)(c) at 5% of the total income before making this deduction and also under sec.36(1)(viii) and Chapter VI-A. The lower authorities computed deduction under sec.36(1)(viii) on the residual amount and then computed deduction under sec.36(1)(viia)(c) since the income from business or profession comes first in the computation of taxable income. Aggrieved, the Assessee is in appeal before us. 29. The learned Counsel for the Assessee submitted that from the wordings of the provisions of the above section, the deduction under each of the above clauses has to be computed on income before allowing deduction under that clause. He submitted that to compute deduction under clause (viia)(c), the deduction must first be computed and allowed under clause (viii); and likewise, to compute the deduction under clause (viii) the deduction must first be computed and allowed under clause (viia)(c). It is therefore apparent that the quantum of deduction under each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome or on the assessed income. The Hon'ble Supreme Court held in that case that it should be computed on the total income. At that time, the words before allowing deduction under that clause were not there in the section. These were inserted by the Finance Act subsequently. There is no dispute before us regarding the computation of deduction on the total income or assessed income. Accordingly, the ratio laid down by the Hon'ble Supreme Court is not applicable. In view of the above discussion, we reject this ground taken by the Assessee. 32. The next ground is that the CIT(Appeals) erred in upholding the levy of interest under sec.234D of the I.T. Act. 33. The provisions of sec.234D came into effect with effect from 01.6.2003. the Asst. Year involved in this case is 2001-02. Hence, in our opinion, the interest cannot be charged in respect of a case falling under the Asst. Year prior to the introduction of this provision into the Statute. The amendment is not retrospective. Hence, in our opinion, interest under sec.234D cannot be charged. The Assessee succeeds before us. 34. This appeal is partly allowed. 35. ITA No. 2398/Mds/03 : The first ground in this appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... giving effect order. 40. The next ground is that the CIT(Appeals) has erred in not disposing off the ground pertaining to erroneous levy of interest under sec.220(2) and wrong computation of interest payable under sec.244A of the I.T. Act on the refund of tax due to the Assessee. A perusal of the order of the CIT(Appeals) reveals that he has not dealt with the above issue though the same was raised by the assessee before him. These issues are, therefore, remitted back to his file. He is directed to adjudicate these issues on merit and write a speaking order. 41. The last ground in this appeal is that the CIT(Appeals) erred in not disposing off the ground pertaining to non-determination of the Assessing Officer's claim of the Assessee for carry forward of Short Term Capital Loss of ₹ 2,46,12,435/- incurred under the head Capital Gains . At the time of hearing, this ground was not pressed by the learned Counsel for the Assessee. Hence, we dismiss this ground as not pressed. 42. This appeal is partly allowed for statistical purpose. 43. Int. T.A. No.118/Mds/03 and 08/Mds/04: The common ground in these appeals is that the CIT(Appeals) erred in confirming the, of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs Ltd. V. DCIT (95 ITD 356) wherein it was held that :- Interest on 'deposit' is not specifically excluded from the definition of 'interest' under sec.2(7). Interest on loans as well as advances is chargeable to interest tax. The word 'advance' had wide connotations and it means by money advanced to any person. The object and purpose of the Act is to levy tax on interest income earned on loans and advances. Further, the scope of the definition under sec.2(7) is also enlarged as it includes interest not only on loans but also on advances. There is no specific provision in the Act which grands exemption in respect of interest on inter-corporate deposits. Hence, interest tax was leviable on the interest income earned by the Assessee on inter-corporate deposits. Respectfully following the ratio laid down by the Tribunal in the above case, we allow the ground taken by the Revenue. 49. In the result, the Assessee's appeal in ITA No.747/M/05 is allowed for statistical purpose, ITA No.2398/M/03 and 854/M/05 are partly allowed for statistical purpose ITA No.748/M/05 is partly allowed, ITA No.853/M/05 is dismissed and Int.T.A. Nos.118/M/03 and 08/M/0 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
