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2016 (11) TMI 1012

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..... ity of this is enhanced on account of the fact that these are group companies. Even if each of the facts by itself does not support the Tribunal’s conclusion taken together they certainly do. The Tribunal has, therefore, taken a possible view.- Decided in favour of assessee - Income Tax Appeal No. 186 of 2013 (O&M) - - - Dated:- 6-9-2016 - MR. S.J. VAZIFDAR AND MR. DEEPAK SIBAL, JJ. FOR THE APPELLANT : Mr. Vivek Sethi, Advocate FOR THE RESPONDENT : Mr. Ajay Vohra, Senior Advocate with Mr. Gaurav Jain, Advocate S.J. VAZIFDAR, CHIEF JUSTICE: This is an appeal against the order of the Tribunal allowing the assessee s appeal by deleting the disallowance made by the Assessing Officer. The matter pertains to the assessment year 2002-03. The Tribunal s order was passed also in ITA No.119 (Asr)/2011 which is the matter relevant to this appeal. 2. The following substantial questions of law arise in this appeal:- (i) Whether on the facts of the case and in law the Hon ble ITAT was justified in holding that no expense is attributable to the exempted income as the revenue had failed to establish a direct nexus between the expenses incurred and the income earned ig .....

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..... (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning on or before the 1st day of April, 2001. 6. The Assessing Officer rejected the assessee s contention that it had not incurred any expenditure for the purpose of earning the exempt income observing that the possibility of the assessee having incurred expenditure relatable to such exempt income could not be ruled out. The Assessing Officer held that on identical facts for the Assessment Year 2001-02, ad hoc disallowance relatable to such expenditure incurred for the purpose of earning exempt income was made and on the same basis he made a disallowance of ₹ 1.5 crores under Section 14A. The assessee contended that the investment had been made .....

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..... each of the documents. It was observed that in the absence of the bank books and bank statements it was not possible to determine whether the assessee had received free funds available at the time when the relevant investment was made or whether the said investment was made out of interest bearing funds and that as the finding about the utilization of funds can be made from a direct study of the books of accounts and the relevant bank statement, a presumption is liable to be drawn against the assessee in this regard. The assessee s contention that the bank statements were not readily available was not accepted. It was observed that the appellant was otherwise able to produce and submit details of all matters relating to the proceedings in respect of other grounds but had not produced the bank statements or the bank books. It was further observed that the bank statements alongwith bank books were in the exclusive custody of the assessee and could lead to a finding that the assessee utilized borrowed funds for the purpose of making investments. These facts were, therefore, in the special knowledge of the assessee. The documents being in the custody of the assessee and the assessee ha .....

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..... utilize the funds to the maximum advantage which in cases such as these would lead to making investments for the operational assets first out of interest bearing funds. 11. The CIT (Appeals) thereafter analysed various loan agreements. Some of the conclusions were as follows: Though in some cases there are specific covenants about the use or non-use of funds for investment in shares, there is no such stipulation in respect of many of the other borrowings by the assessee. Some of the repayments were linked to the sale of shares by the assessee which sale proceeds would not be available for the purpose of immediately making fresh investment. The assessee s contention that there was a specific covenant in respect of the loan agreements that the loans could be utilized for business purposes only is not borne out from the documents placed on record. The CIT (Appeals) concluded as under:- 10.3 In the light of the facts noted earlier and in the absence of details, a reasonable basis for the disallowance out of interest expenditure would be to consider that both interest bearing and non-interest bearing funds available with the assessee have been used in all the assets in their r .....

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..... Relaxation in ratio by 50% D=0.5*C 0.12 Interest expenditure (Rs. 000) E 154928 Average cost of funds F=E/ Average of B 9.81% Specified investments (Rs.) G 3107576219 4486634216 3797105218 Investment of borrowed funds in Specified Investments (Rs.) H=D*G 441370746 Interest expenditure on borrowed funds invested in Specified Investments (Rs.) I=H*F 43294905 The amount disallowable u/s 14A on account of interest expenditure is thus, computed at ₹ 4,32,94,905/-. The above conclusion of the CIT (Appeals) is in respect of the utilization of the funds namely the funds borrowed on interest and the interest free funds available with the assessee. The CIT (App .....

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..... stments with the interest free borrowed funds. The following findings of fact of the Tribunal are of vital importance: the assessee had during the relevant time invested an aggregate amount of ₹ 152.05 crores out of which an amount of ₹ 28.18 crores was made in shares of foreign companies. The dividend from the foreign companies was taxable. This, therefore, left an amount of ₹ 123.87 crores which yielded dividends which were exempt from income tax. The assessee realized 117.97 crores from the sale of its investments in the earlier years; ₹ 46 crores was generated from the assessee s operating activities; ₹ 6.87 crores was received from sale of fixed assets and there was an opening cash balance of ₹ 8.90 crores. The aggregate of surplus funds on which there was no interest burden was ₹ 179.74 crores. This amount was available during the relevant previous year. Thus such funds were in excess of the investment of ₹ 123.87 crores. In addition thereto the assessee had generated cash from its financing activities of an aggregate amount of ₹ 24.24 crores. It had purchased fixed assets aggregating only to ₹ 54.62 crores during th .....

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..... levant year and not out of the overdraft account for the running of the business. Consequently the interest paid by the assessee on the overdraft account relatable to the payment of income tax should have been allowed as an admissible deduction in the computation of the assessee's business income. In support of this contention the learned counsel appearing for the appellant relied upon the decisions of the Calcutta High Court in Woolcombers of India Ltd. v. CIT[(1982) 134 ITR 219 : (1981) 23 CTR 204 (Cal)] , Reckitt and Coleman of India Ltd.v. CIT [(1982) 135 ITR 698 : (1982) 26 CTR 24 (Cal)] , Indian Explosives Ltd. v. CIT[(1984) 147 ITR 392 : 1983 Tax LR 356 (Cal)] and Alkali Chemical Corpn. of India Ltd. v. CIT [(1986) 161 ITR 820 (Cal)] . The learned counsel also urged that these decisions having been allowed to be operative for more than 14 years, the principle of stare decisis should be made applicable and, therefore, it must be held that the High Court committed error in not accepting the assessee's contention . 4. Having considered the rival submissions at the Bar though we find considerable force in the arguments advanced by the learned counsel appeari .....

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..... 82) 135 ITR 698 : (1982) 26 CTR 24 (Cal)] was directly to the effect as to where the entire trading receipts deposited by the assessee in the overdraft account and the tax was paid out of the overdraft account whether the interest paid by the assessee for payment of tax out of the overdraft account is an allowable deduction. In Indian Explosives Ltd. case [(1984) 147 ITR 392 : 1983 Tax LR 356 (Cal)] the aforesaid two decisions of the Calcutta High Court had been followed and the question that had been posed was to the effect whether the interest on an overdraft account paid towards the amount drawn for discharging the tax liability could be an allowable expenditure and, therefore, the High Court answered in favour of the assessee and against the Revenue. It may be noticed that in the aforesaid case the Court did not express any opinion on the question whether the interest paid on money borrowed for payment of tax was allowable as business expenditure. To the same effect is the decision of the Calcutta High Court in Alkali Chemical Corpn. of India Ltd. [(1986) 161 ITR 820 (Cal)] emphasis supplied. 16. It may be said that this was a case where the funds were all in a comm .....

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..... he Income-tax Appellate Tribunal. We are in respectful agreement with these observations. There is no reason to restrict the presumption to cases where the funds from different sources are mixed in a common pool. The rational for the presumption is that an assessee would utilize its funds prudently ensuring that it derives the greatest financial advantage. If that be the rational we see no reason for the presumption to be restricted to cases where the different funds are mixed in a common pool. It is, however, only a presumption. 17. In HDFC Bank Ltd. v. Deputy Commissioner of Income Tax and others, 2016 (383) ITR 529 (Bombay), the petitioner filed its return of income for the assessment year 2008-09 in which it declared an income of ₹ 5.81 crores from the investment and securities which were exempt from tax. It treated these investments as stock in trade. The petitioner had during that year paid interest on borrowed funds and claimed the same as expenditure. The petitioner claimed that the investment in tax free securities was made out of its own tax free funds and therefore no disallowance could be made under section 14A. The petitioner contended that it was possesse .....

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..... found with the order of the Tribunal. It is submitted that, the petitioner was not able to establish before the Assessing Officer and the CIT(A) that the amounts invested in the interest free securities came out of interest free funds available with the petitioner. In that view of the matter, it is submitted by him that the order of this Court in HDFC Bank Ltd. (supra) would not apply to the facts of the present case. We are unable to understand the above submission. The Assessing Officer passed the Assessment order on 22nd December, 2010 under Section 143(3) of the Act. The CIT (A) passed an order on 21stNovember, 2011 dismissing the petitioner's appeal. On both the dates, when the orders were passed by the Assessing Officer and CIT (A), the authorities did not have the benefit of the order of this Court in HDFC Bank Ltd. (supra) rendered on 23rd July, 2014. Once the issue is settled by the decision of this Court in HDFC Bank Ltd. (supra), there is now no need for the assessee to establish with evidence that the amounts which has been invested in the tax free securities have come out of interest free funds available with it. This is because once the assessee is possessed of i .....

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..... ed into an agreement dated 01.07.1999. The relevant provisions thereof as set out in the assessment order read as under:- Max UK has agreed to provide the services set forth hereunder:- (a) explore business opportunities initially in the field of Health Care, Financial Services, Life Insurance, Information Technology and allied areas; (b) identify potential collaborations/partners desirous of entering into venture(s) in the aforesaid business areas; (c) conduct due diligence of the potential collaborators/partners as regards its financial, management, technical capabilities and suitably for entering into a collaboration/joint venture; (d) information sharing and bridging of the cultural gap between the potential collaborators/partners and MAX. (e) upon identification of a collaborator/partner and further upon completion of due diligence as aforesaid, render further assistance to MAX for establishing contact with such potential collaborators/parties and further provide necessary interface and transactional services for facilities/consummating the collaboration/joint venture arrangements; and (f) other support services, as may be required, from time tome. 23 .....

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