2024 (8) TMI 120 - HC - Income Tax

Disallowance u/s 14A - interest paid on borrowed capital utilized to earn tax-free interest on bonds is liable to be disallowed - HELD THAT - In the present set of facts, the assessing officer although noted certain facts and figures and certain other paragraphs of the assessment order which discloses that the assessee was also engaged in the business of purchase and sale of bonds and units and it was only for a period of about 2.1/2 months that he borrowed a sum of Rs.7.25 crores whereas the purchases of tax free bonds were made even prior to taking finance and subsequent to the repayment of finance. Therefore, when the Tribunal or the authorities below were of the view that interest on finance taken by the assessee was invested in the tax free bonds which earned some tax free income, then they must have applied their mind on the questions of apportionment, particularly in view of the law laid down in the case of Maxopp. Investment Ltd 2018 (3) TMI 805 - SUPREME COURT and South Indian Bank Limited 2021 (9) TMI 566 - SUPREME COURT afore-quoted. We are of the view that since the impugned order of the ITAT suffers from perversity and examination of facts needs to be made by the fact finding authority i.e., the AO with regard to apportionment or proportionate disallowance, therefore on the aforequoted substantial question of law No.(1) the case deserves to be remanded to the assessing officer. The substantial question of law No.(1) is answered accordingly and the matter is remanded to the assessing officer for apportionment or proportionate disallowance of the interest incurred as expenditure, to the extent related to the tax free interest on bonds. Deduction u/s 80M - deduction from the unit dividend income as interest expenditure incurred in relation thereto and consequent reduction of relief u/s 80M - HELD THAT - As in Distributors (Baroda) Pvt. Ltd. 1985 (7) TMI 1 - SUPREME COURT the Constitution Bench of Hon ble Supreme Court held that deduction under Section 80M is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of gross total income and not with reference to the full amount of dividend received by the assessee. The aforesaid judgment of Hon ble Supreme Court was rendered in the year 1985 while the aforesaid two judgments of Coordinate Bench of this Court are later judgments taking contrary view. It appears that aforesaid judgment of Hon ble Supreme Court was not noticed by the Coordinate Benches of this Court in the aforesaid two judgments. Therefore, the judgments of Coordinate Benches of this Court in the case of National And Grindlays Bank Ltd. 1991 (5) TMI 4 - CALCUTTA HIGH COURT and in Kanoria Investments (P.) Ltd 1998 (2) TMI 97 - CALCUTTA HIGH COURT are per incuriam and are not binding precedent. On Section 80M the aforesaid judgment of Hon ble Supreme Court in Distributors (Baroda) Pvt. Ltd. (supra) is binding. The view taken by the ITAT in the impugned order is in consonance with the law laid down by Hon ble Supreme Court. Thus, substantial question of law No. (2) is answered in favour of the revenue and against the assessee. Interest chargeable u/s 201(1A) - HELD THAT - It is wholly unreconcilable and totally unjustified that when the ITAT has itself found that a separate order was required to be passed for interest chargeable u/s 201(1A) and the AO has not passed a separate order then dismissing the appeal for the aforequoted reason cannot be sustained. Therefore, the substantial question of law answered in favour of the assessee.

Summary

Issues Involved:
1. Disallowance of interest expenditure under Section 14A of the Income Tax Act, 1961.
2. Deduction under Section 80M of the Income Tax Act, 1961.
3. Imposition of interest under Section 201(1A) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

Substantial Question of Law No. 1: Disallowance of Interest Expenditure under Section 14A
The core issue here was whether the interest expenditure incurred on borrowed capital used to invest in tax-free bonds should be disallowed under Section 14A of the Income Tax Act, 1961. The Tribunal upheld the disallowance of Rs. 44,03,373.68. The appellant argued that the interest on borrowed capital was part of the business expenditure and should be allowable. The Court noted that the assessee was engaged in various business activities, including investment in stocks and securities. The Assessing Officer (AO) had disallowed the interest on borrowed capital used for purchasing tax-free bonds, which was reduced by the Tribunal. The Court found that the AO's inference that the entire investment in tax-free bonds was from borrowed finance was incorrect and perverse. The Court cited the Supreme Court's judgment in Maxopp. Investment Ltd. vs. Commissioner of Income Tax, which clarified that the dominant purpose test is not applicable, and the principle of apportionment of expenses is to be applied. The Court remanded the matter to the AO for apportionment or proportionate disallowance of the interest incurred as expenditure related to tax-free interest on bonds.

Substantial Question of Law No. 2: Deduction under Section 80M
The issue here was whether the deduction under Section 80M should be allowed on the entire amount of dividend income. The Tribunal upheld the deduction of Rs. 41,03,833/- from the unit dividend income as interest expenditure incurred in relation thereto, reducing the relief under Section 80M. The appellant relied on the judgments in National and Grindlays Bank Ltd. and Kanoria Investments (P) Ltd., which allowed deduction on the entire amount of dividend. However, the Court found these judgments to be per incuriam as they did not consider the Constitutional Bench judgment of the Supreme Court in Distributors (Baroda) Pvt. Ltd., which stated that the deduction under Section 80M should be calculated with reference to the amount of dividend computed in accordance with the Act. The Court upheld the Tribunal's view and dismissed the appeal on this issue.

Substantial Question of Law No. 4: Imposition of Interest under Section 201(1A)
The issue was whether the interest under Section 201(1A) was lawfully imposed without a separate order. The Tribunal found that a separate order was required for imposing interest under Section 201(1A) but dismissed the appeal on the ground that no separate appeal was filed. The Court found this reasoning unjustified and held that the Tribunal's decision could not be sustained. The Court allowed the appeal on this issue, stating that the interest imposition was illegal without a separate order.

Conclusion:
The appeal was partly allowed. The matter regarding the disallowance of interest expenditure under Section 14A was remanded to the AO for fresh decision on apportionment. The appeal on the deduction under Section 80M was dismissed, upholding the Tribunal's decision. The appeal on the imposition of interest under Section 201(1A) was allowed, finding the imposition illegal without a separate order.