TMI Blog2017 (5) TMI 1504X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax Appeal No. 172 / 2008, D.B. Income Tax Appeal No. 119 / 2010, D.B. Income Tax Appeal No. 141 / 2010 - - - Dated:- 19-5-2017 - HON'BLE MR. JUSTICE K.S. JHAVERI AND HON'BLE MR. JUSTICE INDERJEET SINGH For the Appellant : Mr. Sanjay Jhanwar with Ms. Archana For the Respondent : Mr. R.B. Mathur with Mr. K.D. Mathur JUDGMENT 1. Since all these appeals involve common question of law and facts hence they are decided by this common judgment. By way of these appeals, the appellant has assailed the judgment and order of the Tribunal whereby the tribunal has partly allowed the appeals of the assessee and as well as of department. 2. This court while admitting the appeals framed following substantial questions of law:- (i) Appeal No.172/2008 (i) Whether, under the facts and in the circumstances of the case, the Tribunal was justified in holding that assessment order dated 26.03.2002 was prejudicial to the interest of revenue and sustaining the action taken by the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 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 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 som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins 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. 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 inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondent had enough interest free funds at its disposal for making investment. In the light of the above material the C.I.T. (Appeals) held that it agreed with the contention advanced by the Assessee that they had enough interest free fund at its disposal for investment and accordingly deleted the addition of ₹ 4,40,00,000/- made by the Assessing Officer and directed him to allow the same under Section 36(1)(iii) of the Income Tax Act. We have heard learned Counsel for both the parties. In our opinion 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the C.I.T. (Appeals) and I.T.A.T. 5.2 In Commissioner of Income Tax vs. Winsome Textile Industries Ltd (2009) 319 ITR 204 (P H) wherein Punjab and High Court held as under:- 4. The above finding has been affirmed by the Tribunal in following terms: 20. We have given our 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/056 0/2005 : [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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d no nexus with the borrowed funds. The Assessing Officer as per the assessment order has not refuted the claim of the assessee but has made a disallowance on the ground that had the said funds invested in shares were available with the assessee, the assessee would not have been required to raise loans to that extent and incur expenditure on interest on such loans. In our considered view, the disallowance has got to be made under Section 14A if any expenditure relating to the earning of income which is not chargeable 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 the parties. 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 loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores borrowed from them during the year under appeal. The Assessee has also made investment of ₹ 30.79 crores in shares, debentures and bonds and shown tax free income of ₹ 5.68 crores earned on the investment made. The A.O. was of the view that the Assessee has made huge investment of ₹ 30.79 crores for earning tax free income and for this reason, the Assessee has to resort to borrow funds for his other business purposes. Thus, the borrowing has a nexus with the tax free investment and, therefore, 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment for tax free security were made before the said period. Only a small portion of investment was made subsequently. Assessee had demonstrated that it had other sources of investment and that therefore, according to Assessee no part of the borrowed fund could be stated to have been diverted to earn tax free income. When CIT(Appeals) and tribunal both on facts in the present case found that the Assessee did not invest borrowed fund for earning interest free income, we are of the view that not applying provision 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he availability of other interest free funds with the Assessee the amount available for investments out of its own funds were to the tune of ₹ 398.19 crores. In view thereof, it was submitted that from the analysis of the balance-sheet, the Assessee had enough interest free funds at its disposal for making the investments. The CIT (Appeals) on examining the said material, agreed with the contention of the Assessee and accordingly deleted the addition made by the Assessing Officer and directed him to allow the same 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 E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee. We therefore, are unable to agree with the submission of Mr. Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected. 6. In recent decision of Punjab and Haryana High Court in The Pr. Commissioner of Income Tax, Patiala vs. State Bank of Patiala in Tax Appeal No.244/2016 decided on 30.1.2017 wherein it has been held as under:- 30. It is not necessary to refer to Mr. Bansal'sfurther submissions in support of this issue. We will, therefore, only note them. Mr. Bansal submitted that the computational provision of rule 8D is applicable to investments and not stock-in-trade. Rule 8D, therefore, would not come into play in relation to exempt income by way of dividend and interest from stock-intrade and, accordingly, section 14A would not be applicable in relation to incidental income by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue is required to be anwered in favour of the assessee. 8. Regarding issue no.2, he contended that view taken by the tribunal is required to be reversed as benefit cannot be granted on the basis of census in 1991 when census was in operation and the final notification was to be published. 9. In that view of the matter, the view taken by the tribunal is required to be reversed. 10. Counsel for the respondent Mr. R.B. Mathur on the first issue has relied upon the decision of Supreme Court in Commissioner of Income Tax, Mumbai vs. Walfort Share and Stock Brokers P. Ltd. (2010) 326 ITR 1 (SC) wherein Supreme Court held as under:- 18. The insertion of Section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated 22.11.2001). In other words, Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough of the nature specified in Sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under Section 14A. Reading Section 14 in juxtaposition with Sections 15 to 59, it is clear that the words expenditure incurred in Section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see Sections 30 to 37). Every pay-out is not entitled to allowances for deduction. These allowances are admissible to qualified deductions. These deductions are for debits in the real sense. A pay-back does not constitute an expenditure incurred in terms of Section 14A. Even applying the principles of accountancy, a pay-back in the strict sense does not constitute an expenditure as it does not impact the Profit Loss Account. Pay-back or return of investment will impact the balance-sheet whereas return on investment will impact the Profit Loss Account. Cost of acquisition of an asset impacts th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round that the impugned transaction was a transaction of dividend stripping. The AO in the present case has disallowed the loss of ₹ 1,82,12,862 on the sale of 40% tax-free units of the mutual fund. The AO held that the assessee had purposely and in a planned manner entered into a premeditated transaction of buying and selling units yielding exempted income with the full knowledge about the guaranteed fall in the market value of the units and the payment of tax-free dividend, hence, disallowance of the loss. 11. He contended that matter is required to be remitted back to the AO for calculation and benefit may be granted in view of the recent decision of the Supreme Court. 12. Regarding second issue, he has relied upon the decision of Kerala High Court in The Commissioner of Income Tax vs. The Catholic Syrian Bank Ltd in appeal no.467/2010 other connected matters decided on 21.10.2010 wherein Kerala High Court held as under:- 3. The question, therefore, to be considered is whether Section 14A prior to the introduction of Sub-sections (2) and (3) entitles the Department to make disallowance of expenditure incurred for earning tax free income in cases where Assessee l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation i.e., introduction of Sub-section (2) and the prescription of Rule 8D thereunder, make it clear that there may be cases where it would be difficult for Assessees to maintain separate accounts for earning taxable as well as nontaxable income. However, what we feel is that such difficulty may be experienced in the case of overhead expenditure and administrative expenditure incurred by the Assessee-banks. So far as investments in securities and bonds and also in shares, the income wherefrom is tax free are concerned, we see no reason why Assessee could not have maintained separate accounts for the sources of funds utilised for such investments which, in our view, if the Assessee-banks wanted, they could have maintained. In other words, if the Assessee banks had a case that surplus funds available or funds sourced other than through borrowing only were utilised for investing in securities, bonds and shares which yield tax free income, they could have maintained such accounts and produced the same before the AO when proportionate disallowance was proposed by the AO. By subsequent amendment through Sub-section (2) and by prescribing Rule 8D therein what is achieved is prescribing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the final population totals published and ignored the provisional population total published. It is to be seen what is the object behind Section 36(a), in order to appreciate the said contention. Section 36 of the Act deals with other deductions. Section 36(viia) reads as under: 'Section 36(viia) (In respect of any provision for bad and doubtful debts made by)- (a) a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a nonscheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount [not exceeding seven and one-half per cent] of the total income [computed before making any deduction under this clause and Chapter-VIA] and an amount not exceeding [ten] percent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner: [Provided that a scheduled bank or a nonscheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational bank being weaker by 10% to the aggregate average, advances made in those rural branches is given deduction towards bad and doubtful debts. The Legislature has defined what is rural branch , as it is clear from the Explanation. They have fixed the population of not more than 10,000 as determining the rural branch and that population of 10,000 should be according to the last preceding census of which the relevant figures have been published before the first day of previous year. Therefore, this benefit of 10% of the aggregate average advances made by the rural branches of the bank is extended to the small population, living in the villages which is less than 10,000. If the population of such village is more than 10,000, then the said benefit of 10% deduction is not available. Hence, we keep this object of the Legislature in mind, then interpret with the word rural branch. The word used is 'published' before the first day of previous year. If in the Census it is found that the population of a particular village has crossed 10,000 then the scheduled Bank pertains to that village would not be entitled to the deduction of 10,000 to the aggregate average advances towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee though the provisional figure mentioned is above 10,000 and in the final population total it has gone below 10,000. Therefore, provisional population total cannot be acted and in that view of the matter the Tribunal was justified in upholding the order passed by the assessing authority where they have acted on the Census figures of 2001 as reflected in the provisional population totals and denied the benefit to the assessee. We do not find any error committed by the authorities. In that view of the matter, the substantial question of law is answered in favour of the revenue and against the assessee. We do not see any merit in these appeals. Accordingly, appeals are dismissed. 14. We have heard counsel for the parties. 15. In view of the decision of the Supreme Court in Godrej Boyce Manufacturing Company Ltd.(supra) para no.36, 37 38 reproduced hereinabove, it is true that disallowance which are made by the department is required to be rejected and the assesee will be entitled for the benefits conferred u/s 14A. Thus, the order of the disallowance is reversed and claim which has been made 14A is required to be upheld, therefore, issue is required to be decided in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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