TMI Blog2017 (12) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... assailed the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal of the assessee and dismissed the appeal of the department. 3. Counsel for the appellant has framed the following substantial questions of law:- Appeal No.297/2017 (i)Whether on the facts and in the circumstances of the case the learned ITAT is justified in deleting the addition of ₹ 39,82,710/- made by AO on account of disallowance under Section 14A read with Rule 8D. (ii) Whether on the facts and in the circumstances of the case the learned ITAT is justified deleting the addition of ₹ 26,52,569/- made by the AO u/s 80IA. (iii) Whether on the facts and in the circumstances of the case the learned ITAT is justified deleting the addition of ₹ 1,00,45,602/- made by the AO on account of disallowance of claim of VAT reimbursement. Appeal No.299/2017 (i)Whether on the facts and in the circumstances of the case the learned ITAT is justified in deleting the addition of ₹ 53,27,138/- made by AO on account of disallowance under Section 14A read with Rule 8D. (ii) Whether on the facts and in the circumstances of the case the learned IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dend income. Insofar as the Appellant-Assessee is concerned, the issues stand concluded in its favour in respect of the Assessment Years 1998-1999, 1999-2000 and 2001- 2002. Earlier to the introduction of Subsections (2) and (3) of Section 14A of the Act, such a determination was required to be made by the Assessing Officer in his best judgment. In all the aforesaid assessment years referred to above it was held that the Revenue had failed to establish any nexus between the expenditure disallowed and the earning of the dividend income in question. In the appeals arising out of the assessments made for some of the assessment years the aforesaid question was specifically looked into from the standpoint of the requirements of the provisions of Subsections (2) and (3) of Section 14A of the Act which had by then been brought into force. It is on such consideration that findings have been recorded that the expenditure in question bore no relation to the earning of the dividend income and hence the Assessee was entitled to the benefit of full exemption claimed on account of dividend income. 37. We do not see how in the aforesaid fact situation a different view could have been taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. 3.3He also relied upon the decision of this court in DB ITA No.172/2008 SBBJ vs. CIT decided on 19.5.2017 wherein it has been held as under:- 4.1. In Godrej Boyce Manufacturing Company Ltd. vs. Deputy Commissioner of Income Tax (2017) 81 taxmann.com 111(SC) wherein Supreme Court held as under:- 36. Section 14A as originally enacted by the Finance Act of 2001 with effect from 1.4.1962 is in the same form and language as currently appearing in Sub-section (1) of Section 14A of the Act. Sections 14A (2) and (3) of the Act were introduced by the Finance Act of 2006 with effect from 1.4.2007. The finding of the Bombay High Court in the impugned order that Sub-sections (2) and (3) of Section 14A is retrospective has been c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee. It is onlythereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. 38. In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the Assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and ₹ 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no part of the interest bearing fund have gone into investments in the two companies. In so far as funds are concerned it was pointed out that income from operation of the company was ₹ 418.04 crore which was evenly distributed. Considering this, till December, 1999 the appellant had earned ₹ 313.53 crore from its operation. It had raised capital of ₹ 7.90 crores and had also received interest free deposit of ₹ 10.03 crores. Also it had recovered ₹ 39.04 from its debtors. It was also pointed out that considering the balance sheet for the year ending 31st January, 2000 the availability of interest free fund was as under: Share Capital 180.00 Reserves Surplus 120.00 Depreciation reserves 95.39 Total interest free fund 396.19 It was, therefore, submitted that from the analysis of balance sheet as on 31st March, 2000 the respondent had enough interest free funds at its disposal for making investment. In the light of the above material the C.I.T. (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber's case (Supra) 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 had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of M/s. Winsome Yarns Limited, disallowance under Section 14A shall have to be calculated even when investment has been made in the course of business of the assessee and the assessee qualifies for deduction under Section 36(1)(iii). So, however, Section 14A provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relating to income which does not form part of the total income under the Act. So, it is, therefore, necessary to find out if any expenditure was incurred by the assessee for making investment in the shares of Winsome Yams Limited. During the course of assessment proceedings the assessee had furnished written submission in which it was claimed, vide paragraph 5 of the letter that investment in the shares of Winsome Yarn Limited was made out of the assessee's own fund and not out of any borrowed funds. Before the Commissioner of Income Tax (Appeals) also, vide letter dated March 15, 2007, the assessee had reiterated that investment in the purchase of the shares of Winsome Yarn Limited in the year 1993-94 had no nexus with the borrowed funds. The Assessing Officer as per the assessment order has not refuted the claim of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessee's explanation deleted the addition making following observations: 4. The facts of the case and arguments of the Appellant have been considered. The Appellant had utilized own funds for making investments in shares, debentures, etc. The loan availed from the Power Finance Corporation was entirely utilized for business purpose and the interest paid was eligible for deduction Under Section 36(1)(iii) of the I.T. Act. There was no finding that any expenditure by way of interest was incurred in respect of the investments in securities and shares and accordingly the disallowance Under Section 14A is not justified. The Assessing Officer is directed to delete the allowance. 4. Revenue carried the issue in appeal before the tribunal. Tribunal by impugned judgment confirmed view of the CIT (Appeals) holding as under: 6. We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case, the Assessee paid interest of ₹ 17.31 lakhs to Power Finance Corporation on the sum of ₹ 3.83 crores borrowed from them during the year under appeal. The Assessee has also made investment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... airs in such a manner where his tax liability is reduced provided the Assessee does not resort to any illegal means or enter into a sham transaction for the said purpose. It is the prerogative of the Assessee to use its own fund in the manner in which it considers proper. The Revenue cannot dictate the Assessee that how the Assessee should use its own fund. Thus in our considered opinion the A.O.'s approach in the instant case was not justified. The nexus between the interest bearing fund ant interest free investment as claimed by the A.O. was not correct when it is not in dispute that the own funds were utilized for making tax free investment. Under these circumstances, we do not find any infirmity in the order of the Ld. CIT(A) which is confirmed and the ground of appeal of the Revenue is dismissed. 8. Having thus heard learned Counsel for both sides and having perused the orders on record, we find that in the present case Assessee had sufficiently explained its investment for borrowed funds pointing out that loan was obtained in assessment year 1997-1998 and its majority of the investment for tax free security were made before the said period. Only a small portion of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., reported in MANU/MH/0026/2009 : (2009) 313 ITR 340 (Bom) is well founded. The facts of that case were that the Assessee viz. M/s. Reliance Utilities and Power Ltd. had invested certain amounts in Reliance Gas Ltd. and Reliance Strategic Investments Ltd. It was the case of the Assessee that they themselves were in the business of generation of power and they had earned regular business income therefrom. The investments made by the Assessee in M/s. Reliance Gas Ltd. And M/s. Reliance Strategic Investments Ltd. were done out of their own funds and were in the regular course of business and therefore no part of the interest could be disallowed. It was also pointed out that the Assessee had borrowed ₹ 43.62 crores by way of issue of debentures and the said amount was utilised as capital expenditure and intercorporate deposit. It was the Assessee's submission that no part of the interest bearing funds (viz. Issue of debentures) had gone into making investments in the said two companies. It was pointed out that the income from the operations of the Assessee was ₹ 313.53 crores and with the availability of other interest free funds with the Assessee the amount availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had urged the contention before the High Court. The principle, therefore, would be that if there were funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal. 5. We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the ITAT in the present case is that the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Uti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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