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2016 (11) TMI 1012 - PUNJAB AND HARYANA HIGH COURT

2016 (11) TMI 1012 - PUNJAB AND HARYANA HIGH COURT - [2016] 388 ITR 81 - Disallowance u/s 14A - Held that:- The funds/reserves of the appellant were sufficient to cover the interest free advances made by it to its sister company. We are entirely in agreement with the judgment of the Bombay High Court in Commissioner of Income Tax v. Reliance Utilities & Power Ltd., (2009 (1) TMI 4 - BOMBAY HIGH COURT) para-10, that if there are interest free funds available a presumption would arise that investm .....

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not necessarily be recorded in writing. Advice, introductions, information may well be communicated orally. The possibility 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 Tribunalís 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 .....

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ns 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 ignoring that even indirect expenses are attributable u/s 14A as has been made clear by providing for Rule 8D(2) in subsequent assessment years? (ii) Whether on the facts of the case the ITAT is right in holding that .....

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7,490/- computed under section 115JB of the Income Tax Act, 1961. A revised return in the same terms was filed except to declare a short term capital gain arising from the sale of one of the divisions. The matter was taken up for scrutiny and a questionnaire was addressed to the assessee. Re: Question (i) 5. During the previous year relevant to assessment year 2002-03, the assessee admittedly earned exempted income by way of interest of which ₹ 55 lakhs was interest on Maharashtra State El .....

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er this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the cor .....

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47 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 o .....

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ing the relevant previous year and that no expenditure was attributable towards earning the same as the dividend received was only incidental to the holding of shares; that the dividend was received by single dividend warrants, and therefore, no expenditure was incurred to earn such dividend; that the assessee had not claimed any expenditure in relation to income which did not form part of the total income; that there was no nexus between the dividend expenditure and the expenses which were soug .....

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ect of the utilization of the borrowed funds or to show the sources of funds for the investment made on the ground that the bank statements related to an old period and that it was difficult, therefore, to produce the same. The assessment order under Section 143(3) was passed on 30.03.2004 and the order of the CIT (Appeals) is dated 19.01.2006. The same pertain to the assessment year 2002-03. The assessee, however, further contended that the positive cash flow and surplus interest free funds ava .....

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IT (Appeals). The assessee also relied upon the agreements it had entered into with various lenders to establish that the funds borrowed on interest were utilized for purposes other than the said investment. The CIT (Appeals) analysed 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 .....

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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 having failed to produce the same though asked to do so, when a sho .....

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stments whereas its shareholders funds decreased. The CIT (Appeals) held that a natural presumption, therefore, arises from the balance sheet that the increase in borrowings had gone to fund the increase in investments yielding exempt income. 9. This presumption is unfounded. Merely because the interest free funds with the assessee have decreased during any period, it does not follow that the funds borrowed on interest were utilized for the purpose of investing in assets yielding exempt income. .....

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decreased. In that event so long as even after the decrease thereof there are sufficient interest free funds the presumption that they would be first used to invest in assets yielding exempt income applies with equal force. 10. The CIT (Appeals) also observed that since the business of the assessee was mainly in its operation, it must be presumed that most of the share capital would go into operational assets like fixed assets before being used for making investments. There is no basis for such .....

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he 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 .....

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ssets in their respective proportions of the total funds available with the assessee as shareholders funds and as borrowed funds. This includes utilization in investment from which exempt income is earned or can be earned. However, taking into account the fact that some loans do have a specific covenant for non-utilization in shares etc. and that borrowed funds invested in such shares may have been repaid from the profits or other non-interest bearing funds during the year, I think it fair to al .....

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f expenses as compared to the cash flow statement, since it takes into account the brought forward capital as well as the borrowings and investments. The financial cost of the borrowed funds is computed by the working out the average cost of funds, which is the total interest expenditure divided by the average of the borrowings at the beginning and at the end of the year and applying it to the average of the specified investments for the year. For this purpose, the investments in share of compan .....

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wed funds to total funds C=Average A/(Avg.A+ Avg.B) 0.23 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 .....

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ed the administrative expenditure relating to the investment from which exempt income was earned to be ₹ 20 lacs during the relevant previous year. Accordingly, the disallowance under section 14A was computed at ₹ 4,52,94,905/- which was the sum of ₹ 4,32,94,905/- and ₹ 20,00,000/- respectively. This, therefore, replaced the disallowance of ₹ 1.50 crores made by the Assessing Officer. The Assessing Officer was directed to consider the amounts of disallowance also fo .....

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t the main thrust of the orders impugned before it was that the assessee had failed to furnish the bank statements and that, therefore, an adverse inference ought to be drawn against it. The Tribunal, however, also observed that the authorities indicated that the presumption as regards the utilization of interest free funds and borrowed funds in a mixed pool ought to be in favour of the assessee. The Tribunal noted that the assessee is a listed company and was required to publish its accounts an .....

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addressed itself to the correct question, namely, to determine if there was any nexus between the additional investments 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 .....

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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 the relevant period. The findings, therefore, that the assessee had sufficient interest free funds to make the investment yielding tax free returns cannot be faulted. The absence of bank bo .....

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e Tax Reports 224 (SC) is well founded. The Tribunal referred the following question to the High Court:- "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment of interest of ₹ 28,488/- on money borrowed for payment of income-tax was not an expenditure laid out wholly and exclusively for the purpose of business as contemplated by sub- section (1) of Section 37 of the Income-tax Act, 1961?" In that case, the assessee had an .....

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ofits in the over draft account and the amount thus deposited being much more than the tax liability, it should have been presumed that the taxes were paid out of the profits of the relevant year and not out of the over draft account for running of the business. The Supreme Court held as under:- 3. Mr. Dipak Bhattacharyya, learned counsel appearing for the appellant, argued with vehemence that the assessee having deposited the entire profits in the overdraft account and the amount thus deposited .....

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ess 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 urg .....

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the facts and circumstances of the present case, on going through the order of the Tribunal as well as the question referred to by the Tribunal for being answered by the High Court and the arguments advanced before the Tribunal as well as in the High Court by the counsel appearing for the assessee, it is not possible for us to hold that any such contention, as was advanced before this Court by the assessee had in fact been advanced either before the Tribunal or before the High Court. The questi .....

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unt paid for the relevant year and all other germane factors. But when the assessee never advanced the contention either before the Tribunal or before the High Court and the amplitude of the question posed before the High Court does not bring within its sweep the contention as is advanced by Mr Bhattacharyya, learned counsel in this Court, it would not be appropriate for this Court to look into the additional papers produced by the assessee for entertaining the contention and answering the same. .....

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terials and the assessee had urged the contention before the High Court. The aforesaid decision has been followed in the case of Reckitt [(1982) 135 ITR 698 : (1982) 26 CTR 24 (Cal)] where without any further discussion the Woolcombers case [(1982) 134 ITR 219 : (1981) 23 CTR 204 (Cal)] has been followed. But it may be noticed that the question posed in Reckitt case [(1982) 135 ITR 698 : (1982) 26 CTR 24 (Cal)] was directly to the effect as to where the entire trading receipts deposited by the a .....

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ax 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)] ………… .....

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- If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interestfree funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT, [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd., [1982] 134 ITR 219 where a similar issue had arisen. Before the Suprem .....

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lcombers of India Ltd.'s case, [1982] 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee h .....

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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 .....

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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 possessed of sufficient interest free funds of ₹ 2153 crores as against the investment in tax free securities of ₹ 52.02 crores and that there was a presumption that the investment which had been made in the tax-free securities had come out of the interest-free funds available with the petitioner. The Div .....

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A of Act. Thus, decision of this Court in HDFC Bank Ltd. (supra) for the first time on 23rd July, 2014 has settled the issue by holding that the test of presumption as held by this Court in Reliance Utilities and Power Ltd. (supra) while considering Section 36(1)(iii) of the Act would apply while considering the application of Section 14A of the Act. The aforesaid decision of this Court in HDFC Bank Ltd. (supra) on the above issue has also been accepted by the Revenue inasmuch as even though the .....

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rst time by this Court in HDFC Bank Ltd. (supra). Thus, there is no conflict as sought to be made out by the impugned order. Thus, the impugned order has proceeded on a fundamentally erroneous basis as the ratio decindi of the order in Godrej and Boyce Manufacturing Co. Ltd. (supra) had nothing to do with the test of presumption canvassed by the petitioner before the Tribunal on the basis of the ratio of the decision of this Court in HDFC Bank Ltd. (supra). 16. At the hearing Mr. Suresh Kumar, l .....

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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 decisio .....

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at the hearing on behalf of the Revenue. …..emphasis supplied We respectfully agree with these observations. While it is only a presumption, it is one which is in the assessee s favour. The Department could have rebutted this presumption by calling for the records from the bank itself. It chose not do so at though the assessee stated that it was not in possession of the records. There was no application either before the Tribunal or before us for an opportunity to lead further evidence i .....

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ficient to cover the interest free advances made by it of ₹ 10.29 crores to its sister company. We are entirely in agreement with the judgment of the Bombay High Court in Commissioner of Income Tax v. Reliance Utilities & Power Ltd., (2009) 313 ITR 340, para-10, that if there are interest free funds available a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the in .....

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is the assessee s associated enterprise. The audit report under section 92E was filed alongwith the return of income. The assessee and M/s Max UK Ltd. entered 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) id .....

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gence 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. There is some discrepancy regarding the pound sterling equivalent to the Indian rupees that were paid. This need not detain us as it not relevant for this judgment. Th .....

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fact rendered and from which the assessee benefited, the assessee relied upon the fact that its total exports were in excess of ₹ 29 crores and that it had also benefited in the area of Health Care Services pursuant to the notification received from M/s Max UK Ltd. 24. The Assessing Officer and the CIT (Appeals) held that the assessee had not furnished any details to establish that the services were infact rendered; that although the agreement provided details of the services to be provide .....

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