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TMI Blog2017 (8) TMI 1320X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that Rs. 1,84,15,499/- was not liable to tax u/s 2(22)(e) on account of funds received from the company in which the assessee was holding more than 10% share capital?" 2.1 Subsequently, since question no.5 was not typed out, vide order dt. 11.12.2015 following question was also added:- "Whether the findings of the tribunal are perverse in deleting addition of Rs. 92,94,092/- when the interest bearing loans were taken from banks and parties and utilized in investment of shares which earned dividend being tax free then the expenditure incurred for earning tax free income was to be disallowed u/s 14A." 3. Counsel for the respondent Mr. Jhanwar has pointed out that in view of the circular dt.12.6.2017 wherein para no.2 & 3 reads as under:- "2. The Board has observed that some Courts in the recent past have held that trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of Section 2(22)(e) of the Act. Such views have attained finality. 2.1 Some illustrations/examples of trade advances/commercial transactions held to be not covered under Section 2(22)(e) of the Act are as follows: i. Advances were made by a company to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006 with effect from 1.4.2007. The finding of the Bombay High Court in the impugned order that Subsections (2) and (3) of Section 14A is retrospective has been challenged by the Revenue in another appeal which is presently pending before this Court. The said question, therefore, need not and cannot be gone into. Nevertheless, irrespective of the aforesaid question, what cannot be denied is that the requirement for attracting the provisions of Section 14A(1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend 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 20012002. 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains 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 for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang v. Commissioner of Income Tax (1992) 193 ITR (SC) 321 [At Page 329]. We are aware of the fact that strictly speaking res judicata 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." 3.3 He 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 & Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the Assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the Assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the Assessee. It is only thereafter 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from distribution of power and investments made were in the companies in energy sector and were with a view to build long term business prospects. Investments were in the regular course of business and accordingly no part of interest can be disallowed when the fund is utilized for the purpose of business. It was also pointed out that respondent had borrowed Rs. 43.62 crores by way of issue of Debentures and the said amount was utilised as capital expenditure and inter corporate deposit. It was the submission that 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 Rs. 418.04 crore which was evenly distributed. Considering this, till December, 1999 the appellant had earned Rs. 313.53 crore from its operation. It had raised capital of Rs. 7.90 crores and had also received interest free deposit of Rs. 10.03 crores. Also it had recovered Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceutical Works Ltd. (Supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrowed funds or invested its own funds. If the assessee has invested its own money in the purchase of shares then there is no question of any disallowance in respect of interest on borrowed funds under Section 14A. However, if the borrowed funds have been utilised for purchase of shares 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Assessing Officer disallowed thededuction of interest of Rs. 17,31,926/- paid on the borrowed funds under Section 14A of the Act and added it back to the total income of the Assessee. This issue was carried in appeal by the Assessee. CIT(Appeals) accepted the Assessee's explanation deleted the addition making following observations: 4. The facts of the case and arguments of theAppellant 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowed funds were utilized for its own business purposes and the investment in earning tax free income were made out of own interest free funds. In our considered opinion, the Assessee is fully justified in arranging its affairs 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Senior Counsel appearing on behalf of the Assessee, that this issue is squarely covered by a judgment of this Court in the case of Commissioner of Income Tax v/s. Reliance Utilities and Power 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axes 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 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, su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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