TMI Blog2008 (7) TMI 1028X X X X Extracts X X X X X X X X Extracts X X X X ..... ns under s. 14A of IT Act, ignoring the fact that the loans were applied for the purposes for which they had been raised. (b) That the learned CIT(A), Ludhiana, has wrongly not accepted that interest earned by the company which was shown under head Other income in Annex. XI of the balance sheet be reduced from the interest paid by the company representing part of the assets on which disallowance has been considered also by applying the proportionate basis. (c) That the learned CIT(A), Ludhiana, has wrongly confirmed the disallowance of interest even in relation to the investments, on which profit/gains are not exempt as per the provisions of the IT Act. (d) That the learned CIT(A), Ludhiana, has wrongly upheld the disallowance of interest under s. 14A in respect of investments on which no income has been accrued or received during the year under consideration. (e) That the learned CIT(A), Ludhiana, has wrongly rejected the appellant s arguments that no disallowance under s. 14A is called for since company s reserves and surplus are much more than the total investments. Although the assessee has raised multiple grounds of appeal however the grievance is solely directed against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st March, 2003. Further the assessee had also undertaken purchase and sales of mutual funds units during the year. That the assessee had made total investment of ₹ 1,49,43,72,184 in long-term investment as on 31st March, 2004 as compared to ₹ 97,85,63,400 as on 31st March, 2003. The AO held that it could not be claimed by assessee that no investment has been made in the shares and mutual funds out of the borrowed funds. The AO has further referred to the judgment of the jurisdictional High Court in the case of CIT vs. Abhishek Industries Ltd. (2006) 205 CTR (P H) 304 : (2006) 286 ITR 1 (P H) to observe that in view of this judgment as the assessee had borrowed certain funds on which liability to pay interest was being incurred and on the other hand, certain amounts had been invested in earning tax free dividend income a part of interest liability would be on account of investments made for earning such tax-free dividend income. For the above reasons the AO concluded that the assessee had invested a part of the borrowed founds for earning the dividend income. The AO has thereafter proceeded to work out the disallowance under s. 14A by making the following discussion : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain unit at Ludhiana and not by any of the other units; that the net increase in investment as on 31st March, 2004 was ₹ 51.58 crores which was made out of dividend received sale proceed of preference shares proceeds of debenture redemption and sale of shares amounting to ₹ 91.82 crores; that there was a clear nexus established between such interest burden-free funds and the investments made in this year; that the AO disallowed interest even with respect to the cost of investment amounting to ₹ 52,04,69,681 (out of the total investment of ₹ 1,49,43,72,184) on which no dividend had been received thus to the said extent when there is no income no disallowance under s. 14A is called for; that even in relation to the amount standing as share application money of ₹ 15,00,00,000 no interest is disallowance as it is a mere advance that each of the units has incurred interest expenditure for specific purposes which is totally de hors the investments made in the main unit; that the total expenditure of interest in the main unit amounted to ₹ 4,60,23,314 on working capital requirements; that in the main unit the assessee had also earned interest on advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) in this regard, which was relied upon by the assessee to support its plea. The Special Bench decision in the case of Punjab State Industrial Development Corporation Ltd. (supra) has also not been agreed to by the CIT(A) on this point for the reason that the same pertained to deduction under s. 80M of the Act and not the provisions of s. 14A of the Act. He therefore, in principle upheld the stand of the AO that even in the absence of any nexus between the interest bearing funds and the investments which have yielded tax-free dividend income, proportionate disallowance out of interest expenditure can be made in terms of s. 14A of the Act. However, on facts, the CIT(A) has come to a finding that the investments in question are made only in the main unit, Ludhiana, and no part of the funds borrowed by the other units has been diverted to the main unit, Ludhiana, to make any investments on which the impugned dividend incomes have been earned. Thus, he has restricted the disallowance to the interest paid by the main unit, Ludhiana. The CIT(A) has worked out the disallowance on the same principle as adopted by the AO but in respect of the main unit only. The disallowance has thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earing funds has been utilized to make the investments which have yielded the exempt dividend income in question. Further, it is submitted by the learned counsel that no disallowance has been made out of the interest expenditure even in the asst. yr. 2002-03 when the dividend income was exempt. The only disallowance was of a sum of ₹ 1,00,000 out of administrative expenses. In this year there is no disallowance made out of the administrative expenses whereas the disallowance has been made out of interest expenditure. It is submitted that even on the principle of consistency no disallowance is merited. In this regard reliance has been placed on the decision of the Punjab Haryana High Court in the case of CIT vs. Leader Valves Ltd. (2008) 214 CTR (P H) 429 : (2007) 295 ITR 273 (P H). The assessee has relied upon the following decisions in the course of the hearing : (i) Dy. CIT vs. B.S.E.S. Ltd. (2008) 113 TTJ (Mumbai) 227; (ii) Harrisons Malayalam Ltd. vs. Asstt. CIT (2008) 19 SOT 363 (Coch); (iii) Shree Shyamkamal Finance Leasing Co. (P) Ltd. vs. ITO (2008) 21 SOT 42 (Mumbai); (iv) Asstt. CIT vs. Lafarge India Holding (P) Ltd. (2008) 19 SOT 121 (Mumbai); (v) Munjal Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to disallow even expenditure which is assumed to have been incurred for the purpose of earning the tax free income. The word incurred refers to the factual spending of the expenditure in relation to the exempt income and does not refer to a deemed spending or assumed spending for the purpose. The learned AM has referred to the Memorandum Explaining the Finance Bill. 2001. His conclusion is that the section has been introduced to nullify certain decisions of the Supreme Court (cited supra). The proposition laid down in those decisions is that where there is both, activity free income and both activities constitute an indivisible business, then the expenditure incurred by the assessee for the purposes of the indivisible business cannot be artificially broken up to identify and disallow expenditure which is supposed to have been incurred for the purposes of earning the exempted income. It was this proposition that is sought to be nullified by s. 14A as rightly held by the learned AM. However, while applying the section there is no authority conferred by the section upon the AO to deem or assume certain expenditure to have been incurred in relation to the tax-free income. Common ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isfied with the correctness of the assessee s claim regarding such expenditure. Sub-s. (3) clinches the position by saying that the AO can determine the amount of expenditure incurred in relation to exempted income on the prescribed basis even where the assessee claims that no such expenditure was incurred by him as a matter of fact. Now, therefore, coming back to the facts of the instant case. In this case the AO and also the CIT(A) have proceeded to invoke s. 14A of the Act, on a mere presumption that the interest bearing funds have been utilized in relation to the exempt income in question. In fact the mandate of the section is to disallow only the expenditure which has been established to be relatable to the incomes which does not form part of the total income. We may now proceed to examine the factual position in the present case. Suffice to say that in the paper book the assessee has placed the sources of investment made in the shares and mutual funds at pp. 3 to 7. We have perused the same and find that the plea of the assessee that the entire investments have been made out of the dividend proceeds, sale proceeds debenture, redemption etc., is borne out of record. In fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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