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TMI Blog2006 (3) TMI 229X X X X Extracts X X X X X X X X Extracts X X X X ..... rroneous and based on surmises and conjectures. 4. The authorities below should have held that entire interest outgo is an allowable deduction under section 36(1)(iii) of the Income-tax Act. 5. The assessment order is bad and wrong in law. 6. The Assessing Officer ought to have determined the losses to be carried forward in accordance with law. 7. The appellant prays that it may permitted to add, amend order forgo all or any of the above grounds of appeal." 2. I.T.A. No. 3722/D/2005 by the assessee is directed against the order of the CIT(A)-XIV, New Delhi dated 16-8-2005 for the assessment year 2001-02 whereby the CIT(A) confirmed the penalty under section 271(1)(c) of the Income-tax Act, 1961. 3. Since both the matters arise on the same facts and of the same assessee for the same assessment year, therefore, both the appeals were heard together and we dispose of the same by this common order. 4. We have heard the learned representatives of both the parties and gone through the observations of the authorities below and details pointed out by the learned representatives of both the parties. 5. Now we take up quantum appeal first for the purpose of disposal:- 5.1 The fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 35.08 crores as at 31-3-2001. Thus, there is no fresh net inflows from loans as at 31-3-2001. As the funds are old for which the interest has been allowed in the past, it is requested that interest may be allowed in this year as well being incurred for the purpose of company's business." 5.2 The Assessing Officer considering the reply of the assessee in the light of the fact that shares are held by the assessee in investment (as stated by the assessee and also written in its memorandum and articles of association) and the earning dividends is inextricably linked with it, observed that following analysis emerges:- 5.3 The assessee has earned dividend of Rs. 20,00,690 which it has treated as exempt under section 10(33) in its return. As per section 10(33) dividend received from domestic company shall not be includible in the total income of the assessee. Section 115-O states that "Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 'Income from other sources', in view of the insertion of sections 14A and 115-O, the decision of the Hon'ble Supreme Court is no longer valid. Consequently, any expense incurred for the purpose of acquiring shares on which dividend income was earned during the year (for whatever reasons) would also be disallowed. The Assessing Officer accordingly disallowed the amount of the interest of Rs. 3,93,69,566 on the basis of above facts. The Assessing Officer after computing the total income reduced the brought forward losses adjusted to the extent of income and he treated the taxable income of the assessee at 'nil'. 5.5 The assessment order was challenged before the CIT(A) and it was submitted that the investment made by the assessee in the equity share capital of Jindal Group is primarily as promoter, to acquire controlling interest, management etc. of group companies. As such the shares are held by the assessee as part of its business activity, the business being that of holding investments. The interest paid for acquiring these holdings is for the purpose of business and is, therefore, deductible under section 36(1)(iii) of the Income-tax Act. It is also stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be read in a broader sense. The words 'in relating to' signify or imply a direct and proximate relationship between expenditure and income. It cannot cover any expenditure relating to the source but not attributable to exempt income. It was submitted that in a case of one indivisible business, section 14A does not have any applicability. The assessee submitted that it holds shares as apart of the promotes' stake and not as investment simpliciter. The main activity of the assessee is to have control over the investee companies. It was submitted that section 14A of the Act can apply at best to an expenditure incurred in relation to income which does not form part of the total income. The provisions of section 14A clearly postulates disallowance of expenditure only in a case where it is proved that the expenses incurred have a real relationship with the income which does not form part of the total income. 5.8 It was further submitted that section 115-O of the Act provides that, in case of a domestic company, any amount declared, distributed or paid by way of dividend shall be charged to income-tax at the specified rates. It was, therefore, submitted that section 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 6 are reproduced as under:- "5. I have carefully considered the facts of the case and have gone through the order of the Assessing Officer and the contentions raised by the appellant. I find that the undisputed facts are that the appellant borrowed certain unsecured loans, which were invested in the equity shares. The appellant paid interest of Rs. 3,93,69,566 on the said loans. Therefore, the facts show that the appellant has financed its investment in equity shares from out of the unsecured loans taken by it. In other words, there is a direct nexus established between the interest bearing loans taken by the appellant and the investment made in the equity shares. 5.1 The appellant has tried to make out a case that it has made investment in the equity share capital of Jindal Group of companies primarily as a promoter in order to acquire controlling interest and management of the Group Companies and, therefore, it should be treated to be part of its business activity and the interest paid should be allowed as a deduction under section 36(1)(iii) of the Act. On careful consideration of the claim made by the appellant, I am unable to persuade myself to accept the said contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merit in view of the Assessing Officer that any expense incurred for the purpose of acquiring shares on which dividend income has been earned would not be allowable as a deduction. As already discussed hereinabove, there is a direct nexus between the investment of interest bearing loans in the investment in shares, on which dividend income has been earned. On these facts, it is held that the appellant is not entitled to claim deduction of interest expenses incurred on the loans borrowed which were utilized for investment in the shares. 5.3 Coming to the decision of the I.T.A.T., Mumbai Bench in case of Mafatlal Holding Ltd in I.T.A. No. 2935/M/02 vide order dated 23-4-2003, I find that the thrust of the observations made by the I.T.A.T. is in a different perspective. In that case, the main 'business' of the assessee was investment in shares and it carried on the activities in respect of the ingredients of an investment and finance company. The Tribunal observed that the main business of the assessee was to 'deal in investments' and hence the dividend income earned by the assessee was income from main business carried on during the relevant year. The question for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. On these facts, it cannot be said that the provisions of section 14A are not to be invoked. 5.4 Coming to the legal position, certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income, is 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. This is against the basic principle of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. By the Finance Act, 2001, a new section 14A has been inserted so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, that no deduction can be made in respect of any expenditure incurred by an assessee in relation to income which does not form par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uperseded by the insertion of new provision in the form of section 14A of the Act. 5.6 On an overall consideration of the facts of the case and the legal position. I am of the considered view that the provisions of section 14A are attracted in the case of the appellant. The addition made by the Assessing Officer on this account is accordingly upheld. 6. In the result, the appeal is dismissed." 5.11 The learned counsel for the assessee reiterated the submissions made before the CIT(A). He has submitted that the assessee is a promoter of Jindal Group of companies and shares are held as stock-in-trade. He has referred to page 39 of the paper book to show the main aims and objects of the company. He has submitted that the assessee being promoter is already accepted by the department in the earlier years. He has filed copy of the assessment order for the assessment year 1995-96 and submitted that the submissions of the assessee that the company had commenced business of making investment in Jindal group of companies and engaged as promoter/investor to acquire controlling interest management etc. of the group companies have been accepted. He has submitted that with this view the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income from other sources as specified in the Act, therefore, it is to be held as income from other sources. However, he has contended that if the real character of the dividend income was the business income, therefore, the interest is deductible under section 36(1)(iii) of the Act. He has relied upon the decision of the Hon'ble Gujarat High Court in the case of Addl CIT v. Laxmi Agents (P.) Ltd [1980] 125 ITR 227. He has further submitted that the assessee claimed deduction under section 36 of the Act which is also accepted in the earlier year. He has further submitted that the borrowings are made by the assessee for the purpose of business for making investment to acquire the control in the Jindal group of companies. He has further submitted that income is there on transfer of the shares securities and dividend income. Source of the income is the sale of shares and in earlier years on sale of shares, business income is accepted. He has referred to page 84 of the paper book. The learned counsel for the assessee also relied upon the decisions in the case of CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616 (Cal.), CIT v Amritaben R. Shah [1999] 238 ITR 777 (Bom.), CIT v. Exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of the shares of Jindal Steel & Power Ltd. in which on 31-3-2000 the number of shares were 1,54,378 and the same have increased as on 31-3-2001 at 1,86,625 shares. The learned D.R. pointed out that the position of the remaining shares are same as were held in the earlier year and in the year under consideration and as such the assessee has not been able to show as to what income is earned on transfer of the shares. He has further submitted that there is no transfer of the shares in the years under consideration. Therefore, the assessee has only source of income from dividend, which is exempt under the Act and as such there is no business activity of sale and purchase of the shares in the year under consideration because there is no change in the investment and as such the authorities below were justified in rejecting the claim of the assessee for deduction of the interest paid on the borrowed capital. The learned D.R. also referred to the order of the I.T.A.T., S.M.C. Delhi Bench and also relied upon the decision of the I.T.A.T. Kolkata Bench in Dy. CIT v. S.G. Investments & Industries Ltd [2004] 89 ITD 44. The learned D.R. further submitted that there is no trading in shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001." 5.16 Section 10(33) as is relevant to the assessment year under appeal provides that any income by way of dividend referred to in section 115-0 would not form part of total income. 5.17 Before dealing with the facts of the case, it would be relevant to discuss the case laws relied upon by the learned counsel for the assessee. In the case of Chugandas & Co. the Hon'ble Supreme Court considered the facts that the assessee firm, a dealer in securities holding securities as its stock-in-trade, had been charged to tax under the Indian Income-tax Act, 1918, in respect of business. It received Rs. 4,13,992 and Rs. 1,01,229 as interest on securities in the years 1946 and 1947 respectively. The firm discontinued its business on 30-6-1947. The question was whether the interest on sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the present case were not investments simpliciter but they were for the purpose of business of the assessee. The relevant question was referred on the issue was (2) Whether, on the facts and the circumstances of the case, the Tribunal was right in holding that though the income from dividend has to be assessed under a separate head, the payment of interest by the assessee on amounts borrowed for purposes of investments must be allowed as business expenditure? The Hon'ble High Court considered the question in the light of the requirement of section 36(1)(iii) of the Act and held that if once it is established that capital was borrowed for the purpose of business, it is immaterial how that borrowed capital was applied because all that clause (iii) of section 36(1) requires is that borrowings, on which interest is paid, should be for the purpose of business. The Hon'ble High Court, therefore, concluded on second issue that the Tribunal was right in holding that though the income from dividend has to be assessed under a separate head, payment of interest by the assessee on amounts borrowed for the purpose of investment must be held as a business expenditure and not as a expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated 14-9-2004 considered the facts that the assessee is a Public Limited Company engaged in investment business. The assessee holds certain shares/securities as investment for the purpose of earning dividend income and capital appreciation. Certain investments are held as trade investments with an intention to trade in the same or for the purpose of acquiring or retaining controlling interest in the companies whose shares are acquired. The I.T.A.T. (S.M.C.-I) Delhi Bench after going through the material on record observed that undisputedly the assessee is purchasing shares to earn the dividend and also purchased shares for trading purpose. Separate accounts have been maintained for the same. Whatever investment is made for the purchase of shares for getting them as investment, they have been shown separately and whatever investment is made for the purpose of trading have been shown separately under the head "Stock in hand". Therefore, it cannot be said that the assessee's purpose was for earning dividend interest. In earlier years, the Assessing Officer himself accepted the claim of the assessee that it is dealing in shares for investment purpose and deals in shares for tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; is to give the provisions of section 115-O(1) in case of conflict, an overriding effect over any other provisions of the IT Act, 1961. It is thus clear that section 115-O(1) is a specific provision overriding in case of conflict, the general provisions. The sub-section (5) of section 115-0 has made it clear that no deduction under any other provisions of Income-tax Act shall be allowed to the company or a shareholder in respect of dividend income which has been charged to tax under section 115-O(1) or the tax thereon. Thus, this sub-section has restricted the allowability of all deductions, which may otherwise be allowable under any other provisions of the Act, against dividend income. It means that the interest paid for borrowings used for purpose of acquiring shares which has resulted in earning of dividend, and all other expenses in relating to the earning of dividend income will not be allowed as deduction under any other provisions of the Income-tax Act. 12. Prior to insertion of sections 10(33) and 115-O of the Act, any dividend declared, distributed or paid by a company to its shareholder was chargeable to tax under the head "Income from other sources" irrespective of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could have been earned only after investments are made. When it is found that the investments in shares are made out of borrowed capital, it is then not understood as to why interest paid on such borrowings should not be regarded as expenditure incurred in relation to earning of dividend income. The amount of such interest is, therefore, required to be deducted from the dividend income before computing the amount of dividend on which the exemption under section 10(33) is to be allowed. The Appellate Tribunal allowed the appeal of the Revenue in this case. 5.27 On consideration of the above facts and legal proposition mentioned above, we are of the view that the facts of the case of the present assessee are clearly distinguishable from the cases relied on by learned counsel of assessee. The CIT(A) in para 5 of the impugned order has specifically mentioned that undisputed facts are that the assessee borrowed certain unsecured loans which were invested in the equity shares. The assessee paid interest of Rs. 3,93,69,566 on the said loans. The CIT(A), therefore, found from the facts that the assessee has financed its investment in the equity shares from out of the unsecured loans tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und that the assessee has simply held these shares as investment and if the same helps the assessee to control the management of Jindal group of companies, it cannot partake the character of business activity. The CIT(A) found that only income arising from the holding of shares as investment in dividend income which is clearly assessable under the head "Income from other sources". The assessee at page 39 of the paper book filed a copy of the memorandum of association of the assessee showing the main objects of the assessee-company. However, on going through such memorandum of association, we find that the CIT(A) was justified in rejecting the contention of the assessee because the objects of the assessee-company did not provide anywhere for making investment in the shares of Jindal group of companies for the purpose of acquiring or controlling the management of such group. The assessee in the balance sheet ending on 31-3-2001 has mentioned the sources of funds out of shareholders' funds and from unsecured loans as mentioned in this order. There is no other source of funds and also mentioned application of the funds, in current assets/loans advanced, closing stock, current liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending 31-3-2001 at page 84 of the paper book in which the income is shown under various heads which includes interest on loans, dividend, interest on income-tax refunds, miscellaneous income and sale of securities. This would also show that the assessee was not trading in the shares either in the preceding assessment year or in the assessment year under appeal. The assessee also filed copy of the computation of income at page 77 of the paper book in which the assessee has shown net loss as per profit and loss account and also shows the loss on trading operation (speculative loss). The assessee has claimed reduction on account of dividend income exempt under section 10(33) of the Income-tax Act. It would also show that the assessee has merely claimed speculative loss in the trading operation and also claimed exemption of the dividend income. There is no trading activity or sales shown for dealing in the shares. These facts clearly show that there was no business activity of the assessee dealing or trading in the shares in the previous year, relevant to the year under appeal. Thus, there is no business or trading activity of the assessee in the year under consideration dealing in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally continued or contemplating to be continued with the profit motive, and not for support or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency continuity and transaction of purchase and sale in class of goods and the transaction must ordinarily be entered into with a profit motive. Now when we apply the ratio of the aforesaid decisions to the facts of the present case, we find that in this case the actions of the assessee is not actuated by the profit motive. In fact, we find very few transactions of purchase and sale of shares of group companies except what had already been made in the earlier years. Only shares of one group company was purchased and there was no transaction of purchase and sale of shares of group companies. Therefore, such transactions could not be regarded as carrying on business for the purpose of section 28 of the Income-tax Act. It was conceded before us that object of making investment in the shares for earning dividend is only incidental but the activity carried on by the assessee could only involve earning of dividend income. Now when transactions for purchase and sale of shares are carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee from other companies in whose share investment have been made out of borrowed funds. Merely because the assessee has shown the investment of the shares as claimed stock-in-trade in the balance sheet by itself would not prove that the assessee was doing any business activity or trading activity dealing in the shares in the year under consideration. In assessment order for the assessment year 1995-96, the Assessing Officer did not consider the case of assessee for applicability of sections 14A and 115-0 of the Income-tax Act. The Assessing Officer merely mentioned the version of assessee. Therefore, this assessment order would not support contention of the assessee. 5.30 Section 115-O was inserted into the Act by the Finance Act, 1997 with effect from 1-6-1997 which has brought substantial changes in the system of taxation of dividend. The new scheme provides that once domestic company is chargeable in respect of profit distributing by it to its shareholders, dividend received by the shareholders of such company would be exempt under section 10(33) of the Income-tax Act. Section 14A of the Income-tax Act is inserted in the Act by the Finance Act, 2001 with effect from 1-4-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for trading purposes. However, in the appeal before us, the assessee could not prove that it had been engaged in trading in shares. The assessee might have shown the investment in the shares in the stock-in-trade but nothing has been proved on record that the assessee was at all engaged in the trading activity and as such merely showing the investments in the shares as stock-in-trade is not enough to prove the contention of the assessee. The contention of the assessee was that it made investment shares for the purpose of controlling the group companies of Jintlal group. That c itself would show that the investment in the shares could not be held to be stock-in-trade because it should have been shown as capital investment in those companies of Jindal group. The decisions cited by the learned counsel for the assessee are, therefore, not applicable to the present case and more particularly because of the insertion of sections 14A and 115-O in the Income-tax Act. 5.32 On the other hand, the observations of the I.T.A.T., Kolkata Bench in the case of S.G. Investments & Industries Ltd. clearly supports the view of the Revenue. 5.33 The learned counsel for the assessee after hearing i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares. Merely because the assessee did not earn dividend out of the investment in certain shares by itself would not prove that the provisions of section 14A are not applicable in this case. It is not a hard and fast rule that on each and every investment in shares, the assessee would earn dividend. The earning of the dividend is not certain, unless the concerned company declared and distributed the dividend because it depends on various factors. The established facts are that the entire borrowed unsecured loans have been invested in the shares for the purpose of earning dividend. Therefore, once the assessee claims exemptions on dividend income under section 10(33) of the Income-tax Act then such dividend is directly related to the investment made in the entire shares. As such it is not possible to accept the alternative contention of the learned counsel for the assessee that part of the interest may be disallowed. This contention of the learned counsel for the assessee is also rejected. No other point is argued or pressed. 5.36 Considering the above facts, circumstances and discussion, we do not find any merit in the appeal of the assessee. The same is, therefore, dismissed. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed to appreciate the fact that there was no recording of satisfaction prior to the initiation of penalty proceedings by the Assessing Officer which is sine, qua non for levy of the penalty under section 271(1)(c) of the Income-tax Act and thus penalty proceedings were bad in law ab initio. It is also stated that the assessee has neither concealed the particulars of income nor furnished inaccurate particulars thereof so as to be liable to penalty under section 271(1)(c) of the Income-tax Act. It is also stated that the addition is made due to bona fide difference of opinion between the assessee and the Assessing Officer in interpreting the provisions of the Act. The learned counsel for the assessee submitted that the Assessing Officer has not recorded satisfaction prior to the initiation of the penalty proceedings and as such penalty is liable to be cancelled on this fact alone. He has relied upon the following decisions of the Hon'ble Delhi High Court:- i. CIT v. Ram Commercial Enterprises Ltd [2000] 246 ITR 568. ii. CIT v. B.R. Sharma [2005] 275 ITR 303. iii. CIT v. Super Metal Re-Rollers (P.) Ltd. [2004] 265 ITR 82. iv. CIT v. Auto Lamps Ltd. [2005] 278 ITR 32. Ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer has nowhere recorded his satisfaction with regard to the concealment of the particulars of income or furnishing inaccurate particulars of income in the assessment order or while dealing with the addition on account of disallowance of the interest paid on the borrowed funds by the assessee. The Assessing Officer after computing the taxable income at 'nil' has initiated the penalty proceedings under section 271(1)(c) of the Act by mentioning "Penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961 have been initiate for filing of inaccurate particulars of income." The CIT(A) considering the decision of the Hon'ble Supreme Court in the case of CIT v. S.V. Angidi Chettiar [1962] 44 ITR 739 held that the Assessing Officer while passing the order has recorded in the foot-note initiate penalty proceedings under section 271(1)(c) of the Income-tax Act, which shows that the Assessing Officer was satisfied in the course of assessment proceedings that the company had concealed its income. The CIT(A) on that basis decided the point on the issue against the assessee and rejected the appeal of the assessee. However, the identical point was considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioning the essential ingredients which the Assessing Officer is obliged to record for initiation of penalty proceedings, the impugned order was passed to pass an order initiating penalty proceedings while passing the assessment order in a routine manner would be an apparent violation of the relevant provisions. In our opinion, the impugned order clearly suffers from the infirmity of non-application of mind. The Assessing Officer had failed to record requisite satisfaction in consonance with the settled principles of law. In these circumstances, we see no reason to interfere with the concurrent view taken by the first appellate authority and the Income-tax Appellate Tribunal. In our view, no question of law arises for consideration of the court in the present appeal and the same is dismissed while leaving the parties to bear their own costs." 14. The Hon'ble Delhi High Court in the case of Super Metal Re-Rollers (P.) Ltd. took the same view and held:- "Held, dismissing the appeal, that it had been submitted that the satisfaction of the Assessing Officer as contemplated in section 271(1)(c) of the Act was inherent in the queries raised by him during the course of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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