2019 (4) TMI 1039 - HC - Income Tax

Disallowance u/s 14A - as alleged assessee failed to demonstrate the exact availability of the interest free funds available in hand at the time of making the said investments - ITAT deleted the addition - HELD THAT - After referring to the decision in case of Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT the Court observed that the Tribunal had come to the factual finding that the assessee had its own funds and that such non- interest bearing funds were in excess of investments in tax free securities. In such circumstances, the Court held that disallowance under Section 14A could not have been made. The facts are similar in the present case. The Tribunal therefore, correctly deleted the disallowance in three out of four assessment years and restricted the same in forth year to the extent the investments exceeded the interest free funds. Learned counsel for the Department however submitted that the assessee failed to demonstrate that in the present year only interest free funds were diverted for making tax free investment. In our opinion assessee was not expected to establish the same. Once the presumption that the interest free funds were utilized for making exempt investment, it would be for the revenue to establish to the contrary which in the present case has admittedly not been done. Bonus Shares treatment as investments with a cost of acquisition of Rs.Nil - the original shares, for which bonus shares were allotted, were present in the trading stock itself for the year under consideration, thus the Bonus shares allotted against the same, were too required to be treated as a part of trading stock itself? - HELD THAT - A very similar situation was examined by the Supreme Court in case of Madan Gopal Radhey Lal. 1968 (9) TMI 14 - SUPREME COURT shares given by company in proportion to the holding of equity capital by share holders would, in the absence of express provision to be contrary be treated as capital and not income. The Assessing Officer has merely proceeded on the basis that the origin of the bonus shares being the shares held by the assessee by way of stock- in-trade, necessarily the bonus shares would also partake the same character. No question of law

Summary

Issues:
1. Disallowance of expenditure incurred by the assessee for earning exempt income under Section 14A of the Income Tax Act, 1961.
2. Treatment of Bonus Shares as investments for the year under consideration.

Issue 1: Disallowance under Section 14A:
The High Court considered the appeal challenging the Tribunal's deletion of disallowance made under Section 14A of the Income Tax Act. The Tribunal found that the assessee had surplus/interest-free funds exceeding investments for certain assessment years, relying on precedents like Reliance Utilities and HDFC Bank. The Court held that if interest-free funds are adequate for investments, no disallowance should be made. The Court emphasized that the burden to prove otherwise lies with the revenue, which was not done in this case. The disallowance was deleted for three assessment years and restricted for the fourth year where investments exceeded interest-free funds.

Issue 2: Treatment of Bonus Shares:
Regarding the treatment of Bonus Shares as investments, the Tribunal ruled in favor of the assessee, citing the Supreme Court's decision in Commissioner of Income-Tax, U.P. v. Madan Gopal Radhey Lal. The revenue argued that the bonus shares should be considered part of stock-in-trade, not investments, to avoid tax. However, the Court found that the bonus shares received by the assessee were to be treated as capital, following the principle that bonus shares distributed by a company are liable to be treated as capital unless expressly provided otherwise. The Court rejected the revenue's argument, stating that bonus shares do not automatically become part of stock-in-trade and can be held as capital assets. The judgment favored the assessee, and the appeals were dismissed as no legal issues were found to arise.

In conclusion, the High Court upheld the Tribunal's decisions in both issues, emphasizing the importance of precedent and legal principles in determining the treatment of expenditures and bonus shares for tax purposes.