TMI Blog2017 (8) TMI 1320X X X X Extracts X X X X X X X X Extracts X X X X ..... rectness 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. No 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 - Decided against revenue - D.B. Income Tax Appeal No. 136 / 2012 - - - Dated:- 3-8-2017 - HON'BLE MR. JUSTICE K.S.JHAVERI AND HON'BLE MR. JUSTICE INDERJEET SINGH For the Appellant : Mr. Anil Mehta with Mr. Sameer Sharma For Respondent : Mr. Sanjay Jhanwar with Ms. Archana Judgment 1. By way of this appeal, the appellant has assailed the judgment and order of the Tribunal whereby Tribunal has dismissed the appeal preferred by the department and partly allowed the appeal of the assessee. 2. This court while admitting the appeal on 19.8.2015 framed following substantial question of law:- Whether the Tribunal was legally justified in holding that the assessee was not liable to be assessed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the sister concern at concessional rates. It was held that the security deposit made by the company to its sister concern was a business transaction arising in the normal course of business between two concerns and the transaction did not attract section 2(22)(e) of the Act. (CIT, Agra vs. Atul Engineering Udyog, Allahabad High Court). 3. In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word advance in section 2(22)(e) of the Act. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department and those already filed, in Courts/ Tribunals may be withdrawn/not pressed upon. 3.1 In that view of the matter, in respect of two issues which are admitted on 19.8.2015, the appeal will not survive in view of the circular issued by CBDT. 3.2 The other issue regarding 14A is squarely covered by the decision of Bombay High Court in Godrej Boyce MFG. Co. Ltd. vs. Deputy Commissioner of Income Tax anr. reported in (2010) 328 ITR 81 which has been now confirmed by the Supreme Court in (2017) 81 taxmann.com 111 (SC) wherein it has been observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 20022003, 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 expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 5. In view of this, part no.1 of issue regarding exemption u/s 14A stand concluded. The income which has been earned from survey made and no loan is taken for investment, the benefit u/s 14A is required to be granted. 5.1. In commissioner of Income Tax vs. Reliance Utilities Power Ltd. (2009) 178 Taxman 135 (Bombay) wherein Bombay High Court held as under:- 5. From the order of the Assessing Officer the assessee in respect of disallowance of interest amounting to ₹ 4.40 crores preferred an Appeal to the C.I.T. (Appeals). It was the contention of the Assessee that the assessee had invested ₹ 389.60 in Gas Limited and ₹ 1.01 in Stra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over ₹ 172 crores was utilised for the purpose of fixed assets in terms of the balance sheet as on 31st March, 1999, is fallacious. Firstly, we are not concerned with the balance sheet as of 31st March, 1999. What would be relevant would be balance sheet as on 31st March, 2000. Apart from that, the learned Counsel has been unable to point out to us from the balance sheet that the balance sheet as on 31st March, 1999 showed that the shareholders funds were utilised for the purpose of fixed assets. To our mind the profit and loss account and the balance sheet would not show whether shareholders funds have been utilised for investments. The argument has to be rejected on this count also. Apart from that we have noted earlier that both in the order of the C.I.T. (Appeals) as also the Appellate Tribunal, a clear finding is recorded that the assessee had interest free funds of its own which had been generated in the course of the year commencing from 1st April, 1999. Apart from that in terms of the balance sheet there was a further availability of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r careful consideration to the rival contentions. In this case, the Assessing Officer has presumed that the investment in shares had been made by the assessee out of borrowed funds. He has accordingly estimated the interest payable in respect of such borrowed funds to make a disallowance under Section 14A. This finding has been disputed by the assessee as, according to it, no borrowed funds have been utilised for the purpose of acquisition of shares. In our considered view, the decision in the case of CIT v.Abhishek Industries Ltd. MANU/IP/0560/ 2005 : [2006] 286 ITR 1 (P H) relates to the provisions of Section 36(1)(iii) and Section 14A which has been invoked in this case which stands on a different footing. Even if deduction under Section 36(1)(iii) is ordinarily available in respect of borrowed funds utilised for the purpose of business Section 14A carves out an exception in so far as any expenditure which is relatable to the earning of dividend income not subject to tax is to be disallowed. It would be relevant to point out that the hon'ble Supreme Court in the case of Rajasthan State Warehousing Corporation v. CIT MANU/SC/0120/2000 : [2000] 242 ITR 450 held that in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to tax has been debited to the accounts by the assessee. Since in this case, the assessee has not incurred any expenditure for making investment in the purchase of shares of Winsome Yarns Limited, no disallowance is warranted under Section 14A. We, therefore, find no justification to interfere with the order of the Commissioner of Income Tax (Appeals) in having deleted the disallowance. The ground of appeal raised by the Revenue in this regard in thus dismissed. 5. We have heard learned Counsel for theparties. 6. The contention raised on behalf of theRevenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this Court in CIT v. Abhishek Industries Ltd. MANU/PH/0531/2006 : [2006] 286 ITR 1 and, therefore, disallowance under Section 14A was justified. 7. We do not find any merit in this submission.The judgment of this Court in Abhishek Industries Ltd. MANU/IP/0560/2005 : [2006] 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, he disallowed the interest paid by the Assessee. In appeal, the Ld. CIT(A) after considering the submissions of the Assessee, held that the entire borrowed funds was utilized by the Assessee for its business purposes and, therefore, the A.O. was not justified in disallowing the claim for deduction of interest for ₹ 17.31 lakhs to the Assessee. We find that in the instant case it is not in dispute that the Assessee has utilized its own funds for the purpose of making investment in shares, etc. from which tax free income were earned. It is also not in dispute that the interest bearing borrowed funds were utilized for its own business purposes from which taxable income were earned by the Assessee. The only grievance of the A.O. is that, the Assessee has arranged the above affairs in such a manner so as to reduce its tax liability. The A.O. was of the view that as the Assessee has not invested its own fund for earning tax free income, it would not have required to borrow interest bearing funds for its own business. In this view of the matter, the A.O. Observed that interest bearing funds had a nexus with the tax free income of the Assessees. In this regard, the Ld/D.R. also pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Section 14A of the Act for taxing such interest was justified. No question of law therefore, is arising for our consideration. 5.4 In Director of Income Tax (IT)-II vs. BNP Paribus SA (2013) 214 Taxman 548 (Bom) wherein Bombay High Court held as under:2. So far as question (b) is concerned, the Tribunal in the impugned order upheld the finding of the CIT(A) wherein a finding of fact has been reached that the dividend earned on shares by the respondent assessee is from its investments in shares out of the respondentassessee's own funds. Consequently, the question of invoking Section 14A of the Income Tax Act, 1961 to disallow expenditure would not arise. Before the Tribunal, the revenue did not challenge the finding of fact recorded by the CIT(A) in the impugned order. In this view of the matter, we see no reason to entertain question (b). 5.5 In Commissioner of Income Tax vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom) wherein Bombay High Court held as under:- 4. We do not agree. In the case at hand, as recorded by the ITAT, undisputedly the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax free securities. The IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the provisions of the Income Tax Act, 1961. The Revenue being aggrieved by the order preferred an Appeal before the ITAT who upheld the order of the CIT (Appeals) and dismissed the Appeal of the Revenue. From the order of the ITAT, the Revenue approached this Court by way of an Appeal. After examining the entire factual matrix of the matter and the law on the subject, this Court held as under:- 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 interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT MANU/SC/0523/1997 : (1997) 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. MANU/WB/0227/1981 : (1982) 134 ITR 219 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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