9911796707
TMI Blog2017 (5) TMI 1504X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT U/s 263 of the Income Tax Act, 1961 while disallowing expenditure incurred in earning exempted income U/s 14A of the Income Tax Act, 1961 and disallowing the claim of deduction for advances made by Rural Branches U/s 36(1) (viia)/B such order is legally sustainable?" (ii) Appeal No.119/2010 "(1) Whether the Tribunal was justified in disallowing expenditure incurred in earning exempt income u/s 10 of Income Tax Act, 1961 as per the provisions of section 14A of the Income Tax Act, 1961 of inseparable banking business and was further justified in directing the Assessing Officer to restrict the disallowance of expenditure u/s 14A as per rule 8D of I.T. Rules, 1962 such conclusion is proper? (2) Whether the Tribunal was justified in confirming the disallowance of Rs. 13,01,96,553/- out of deduction of claim by the appellant u/s 36(1) (viia) in respect of advances made by the Rural Branches of the appellant bank is proper?" (iii) Appeal No.141/2010 "(i) Whether, the Tribunal, was justified in disallowing expenditure incurred in earning exempt income u/s 10 of Income Tax Act, 1961 as per the provisions of section 14A of the Income Tax Act, 1961 of inseparable banking business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 factsituation a different view could have been taken for the Assessment Year 2002-2003. Subsections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 4.40 crores preferred an Appeal to the C.I.T. (Appeals). It was the contention of the Assessee that the assessee had invested Rs. 389.60 in Reliance Gas Limited and Rs. 1.01 in Reliance Strategic Investments Limited. The Assessee themselves were in the business of generation of power. The Companies in which the investments were made, were in the energy sector. Investments were made mainly during January, 2000 to March, 2000. It was the submission of the Assessee that they had earned regular business 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 intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 398.19 crores including Rs. 180 crores of share capital. In this context, in our opinion, the finding of fact recorded by C.I.T. (Appeals) and I.T.A.T. as to availability of interest free funds really cannot be faulted. 10. 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. (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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 case of indivisible business where part of business income is exempt the expenditure cannot be apportioned and part relating to income which is exempt cannot be disallowed (judgment dated February 23, 2000). However, the Finance Act, 2001, incorporated Section 14A with effect from April 1, 1962, which provides for disallowance of expenditure relating to income not included in the gross total income. Therefore, it is to be ascertained as to whether the assessee has made the investment in purchase of shares out of borrowed 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, Section 14A could have no application. 5.3 In Commissioner of Income Tax vs. Gujarat Power Corporation Ltd (2013) 352 ITR 583 (Guj) wherein Guajrat High Court held as under:- 3. 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 Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 placed reliance on the decision of the Hon'ble Delhi Special Bench of the Tribunal in the case of Aquarius Travels Pvt. Ltd. v. ITO 111 ITD 53 (SB) (Del.) wherein it is held that where tax free income was earned by the Assessee by making investment out of borrowed funds, then the proportionate amount of interest on funds utilized for earning tax free income by the Assessee was to be disallowed. It is thus, observed that the above decision is not applicable to the facts of the instant case as in the instant case it is not in dispute that the 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 suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der. 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 ITAT therefore held that there was no basis for deeming that the Assessee had used the borrowed funds for investment in tax free securities. On this factual aspect, the ITAT did not find any merit in the contention raised by the Revenue and therefore, accordingly answered the question in favour of the Assessee. On going through the order of the CIT (Appeals) dated 28th March 2005 as well as the impugned order, we do not find that the CIT (Appeals) or the ITAT erred in holding in favour of the Assessee. In this regard, the submission of Mr. Mistry, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 Woolcombers of India Ltd.'s case MANU/WB/0227/1981 : (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 had urged the contention before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not include stock-in-trade. He relied upon Accounting Standard (AS) 13, issued by the Institute of Chartered Accountants of India, to contend that there is a distinction between investment and stockin-trade. Stock-in-trade is not investment as per clause 3.1 of AS 13. Rule 8D refers only to investment and not stock-in-trade. Section 14A and rule 8D constitute an integrated code and as the computation provisions do not apply, as the word used therein is investment and not stock-in-trade, the charging section cannot be read to include stock-in-trade. Mr. Bansal then relied upon the fact that variableB in rule 8D(2)(ii) refers to "the average value of investment". He emphasised the word "investment". He relied upon clause 3.1 of AS 13 issued by the Institute of Chartered Accountants of India, recognized under section 145(2) of the Act, in so far as it draws a distinction between investment and stockin-trade. As per clause 3.1, stock-in-trade is not an investment. He contended that section 14A, which is a charging section, and rule 8D, which is the computation provision, constitute an integrated code and as the computation provisions do not apply, as the word used therein is "inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred in respect of exempt income was being claimed against taxable income. The mandate of Section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of Section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of Section 14A. In Section 14A, the first phr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return of investment and cost of acquisition are distinct concepts. Therefore, one needs to read the words "expenditure incurred" in Section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax. As stated above, the scheme of Sections 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/ expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the facts of the case a proper Debit Item to be charged against the Incomings of the business in ascertaining the true profits. A return of investment or a pay-back is not such a Debit Item as explained above, hence, it is not "expenditure incurred" in terms of Section 14A. Expenditure is a pay-out. It relates to disbursement. A pay-back is not an expenditure in the scheme of Section 14A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring for the Revenue relied on our judgment in IT Appeal No. 1784 of 2009 dt. 14th June, 2010 in the case of CIT v. Smt. Leena Ramachandran [reported at (2010) 235 CTR 512 : (2010) 45 DTR 312--Ed.] for the proposition that estimated disallowance under Section 14A is permissible. Another decision cited by the Revenue in support of their contention is the recent decision of the Supreme Court in CIT v. Walfort Share and Stock Brokers (P) Ltd. MANU/SC/0457/2010 : (2010) 233 CTR (SC) 42: (2010) 41 DTR (SC) 233: (2010) 326 ITR 1 (SC). Both counsel appearing for Assessee-banks relied on decision of the Supreme Court in CIT v. Indian Bank Ltd.MANU/SC/0145/1964 : (1965) 56 ITR 77 (SC) and contended that where separate accounts are not available with the bank with regard to expenditure incurred on earning tax free income, there is no scope for disallowance under Section 14A at all. According to both counsel for the Assessees proportionate disallowance is called for only under Sub-section (2) r/w Rule 8D of the IT Rules which came into force from 2007-08 onwards and the same cannot be applied for any earlier assessment year. We do not think much reliance can be placed on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These are, therefore, only clarificatory provisions and in our view, the main clause of Section 14A apply for all periods after the introduction of the same in the statute which authorises the officer to make disallowance of the expenditure incurred for earning tax free income, irrespective of whether Assessee maintained separate accounts or not. Considering the significant amount of tax free income earned by the Assessee-banks for all the years involved, we are of the view that the investment for earning tax free income is substantial and if assessment is made without making disallowance under Section 14A, the same will render a distorted figure of taxable income which is not permissible under the Act. If the Assessee does not maintain separate accounts, it is for the AO to estimate the same by adopting a rational basis. In principle, we, therefore, uphold the disallowance made by the AO under Section 14A. We, therefore, uphold the order of the Tribunal impugned in IT Appeal No. 40 of 2010 wherein they have followed a Special Bench decision of the Mumbai Bench of the Tribunal in ITO v. Daga Capital Management (P) Ltd. MANU/IU/0044/2008 : (2008) 119 TTJ (Mumbai)(SB) 289: (2008) 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the amount of such assets shown in the books of account of the bank on the last day of the previous year:] [Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words five per cent", the words "ten per cent" had been substituted:] [Provided also that a scheduled bank or a non-scheduled bank referred to in this subclause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government ;Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession:"] [Explanation. - For the purposes of this subclause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the of April, 2005] "Explanation to Section 36(1)(viia), C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the Census figure. Therefore, the said provision stipulates that Census figure has to be published. Therefore, it is only after publication of the Census figures one may be able to decide whether it is a rural branch as defined under the Act or not. The last stipulated population necessarily would be with reference to particular date. That day is also prescribed as that date before first day of the previous year. Once the publication of census is made before the first day of the previous year, then the said information is in public domain. Therefore, on that basis one could find whether a branch is a rural branch or not. It is no doubt true that the Census Department initially publishes a provisional population total. Probably calling objections from the public and after considering those objections, publishes final population total. The Legislature has used the words "bad and doubtful debts" and the words "provisional" and "final" conspicuously missing in the said words. The word published has to be understood as final population as contended by the learned counsel appearing for the assessee. If other words are added it would amount to re-writing which is impermissible in law. K ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
