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TMI Blog2011 (5) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0 per cent optional convertible preferential shares - assessee has given the loan to the Associated Enterprises in US dollars - As it is noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LIBOR rate - Decided in favor of the assessee Regarding TDS credit - It was the submission that before the DRP the issue had been raised and the DRP called for a remand report and the remand report was received on 27-8-2010 as per para 16 of its order and the remand report had not been granted for its rebuttal - As it is noticed that the remand report has been received by the DRP on 27-8-2010 and the same has not been granted to the assessee for its rebuttal, this issue is restored to the file of the Assessing Officer for re-adjudication - Appeal is allowed for statistical purpose - 2148 (MDS.) OF 2010 - - - Dated:- 20-5-2011 - ABRAHAM P. GEORGE, GEORGE MATHAN, JJ. Sriram Seshadri for the Appellant. Shaji P. Jacob for the Respondent. ORDER George Mathan, Judicial Member. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rized representative submitted that the disallowance was out of the interest paid by the assessee on the loans borrowed for business purposes. It was submitted that the total interest payment during the relevant assessment year was about Rs. 42 crores. It was the submission that the Assessing Officer had accepted the claim of interest payments as incurred for business purposes and excludible from the disallowance under section 14A to an extent of Rs. 8.14 crores. It was the submission that the balance of Rs. 33.86 crores was considered for disallowance by the Assessing Officer. The learned authorised representative of the assessee placed before us the chart showing the break up of the interest disallowed by the Assessing Officer to the extent of Rs. 33.86 crores. This is as follows : Sr. No. Break up of interest disallowed by A.O. to the extent of INR 33.86 crores Amount of Interest (INR in crores) Paper Book reference U 1. IDFC Limited (Break-up given below) 25.18 27 2. Standard Chartered Bank 3.43 28 3. Standard Chartered Investment and Loans Ltd. 2.37 29 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement which was found at pages 99 to 102 of the paper book. It was the submission that the main addition during the year was investment in the shares of Tata Tele Services Ltd. to the extent of Rs. 884 crores for which the assessee had sourced its own funds to an extent of Rs. 35 crores representing a repayment of loan from M/s. Aircel Televentures Ltd. and share application money received from Shri C. Shivsankaran, who is the promoter shareholder to an extent of Rs. 67.10 crores. It was the submission that Rs. 102 crores out of Rs. 884 crores was clearly out of the non-interest bearing funds and it was also not out of any loans taken. The balance 782 crores was sourced by taking a short term loan from M/s. Kalimati Investment Co. Ltd. to an extent of Rs. 132 crores and the balance of Rs. 650 crores was a loan taken from M/s. Standard Chartered Investment and Loans Ltd. as an ICD (Inter Corporate Deposit) of 10.5 per cent per annum for an amount of Rs. 250 crores and 9.5 per cent per annum for Rs. 400 crores. The break up of the same was found at pages 109, 110 and 114 of the paper book. It was thus the submission of the learned authorised representative that the loan from Standa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which it had been used for making the investments in the shares of TTSL. It was the submission that if at all a disallowance under section 14A was called for it should be restricted to the said amount of Rs. 8.68 crores and nothing further as the direct linking of the loans to the purpose for which the same had been used had been clearly shown by the assessee. The learned authorised representative further drew our attention to the financial results of TTSL. It was the submission that during the financial year 2004-05 relevant for the assessment year 2005-06 the profit after taxation was a loss of Rs. 1664.07 crores. For the assessment year 2006-07 it was a loss of Rs. 1878.21 crores. For the assessment year 2007-08 it was a loss of Rs. 2062.52 crores. For the assessment year 2008-09 it was a loss of Rs. 1813.76 crores and for the assessment year 2009-10 it was a loss of Rs. 1814.31 crores. It was the submission that from the financial results of TTSL clearly showed that it would not be turning the corner into a profit any time in the near future. It was the submission that the investment in the shares of TTSL by the assessee was purely a venture capital investment. The learned aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been held that where the assessee did not make any claim for exemption section 14A could have no application. He also placed reliance upon the decision of the Hon'ble Supreme Court in the case of CIT v. Walfort Share Stock Brokers (P.) Ltd. [2010] 192 Taxman 211 wherein in para 18 of the said order the Hon'ble Supreme Court has held that "for attracting section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income." It was the submission that there was no proximate connection between the interest paid by the assessee and any dividend income as the assessee had not received any dividend income nor it had claimed any income as not includible in its total income. He also placed reliance on the circular No. 14 of 2001 dated 22-11-2001 issued by the CBDT to submit that in the said circular also the Board had explained that the provisions of section 14A were for restricting the claim of expenses in relation to the exempt income. It was the submission that as there was no exempt income no disallowance under section 14A was liable to be made in the hands of the assessee. 6. In reply the learned DR submitted that as per the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee has invested in the shares by using borrowed funds, the expenditure in the form of interest on the borrowals was liable to be disallowed by invoking the provisions of section 14A. It was the submission that as a result of the survey on the assessee on 20-8-2009 the Assessing Officer had directed the assessee to give the details of the interest on the investments. It was the submission that the assessee had given the break up vide a letter dated 26-8-2009 and again by a letter dated 10-9-2009 which were shown at pages 1 and 2 of the paper book. It was the submission that this was to an extent of Rs. 30.89 crores and the assessee had also paid taxes to the tune of Rs. 40 crores keeping in view the disallowance of interest under section 14A. It was the submission that the assessee after having made a declaration should not be permitted to go back from such declaration. It was the further submission that when the assessee had invested its interest-free funds for the purchase of shares and had borrowed money for running its business, it automatically made the investment by the assessee of its interest-free funds in the investments which derived the assessee income whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents in shares was only to an extent of Rs. 782 crores and the loan was taken only on 25-2-2006. It was the submission that the assessee had no intention to earn dividend. The letters referred to by the Assessing Officer were the letters wherein the assessee was asked to give the details of the interest attributable to the funds used for making the investments. Nowhere was the assessee asked to link the interest expenditure to the loans if any utilized for making the investments. It was the further submission that the decision in the sister concern's case had no applicability insofar as the issue in the said decision was in relation to the carry forward of short term capital loss for which purpose he drew our attention to paras 4 to 4.6 of the order of the Tribunal in the case of Siva Ventures Ltd., referred to supra. It was the submission that the decision of the Hon'ble Punjab Haryana High Court in the case of Winsome Textile Industries Ltd., referred to supra, squarely applied insofar as the assessee has not claimed any exemption and consequently no disallowance under section 14A could be made. He relied on the decision of the Hon'ble Supreme Court in the case of Walfort Share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciple of taxation is to tax the net income and this principle applies even for the purpose of section 14A and expenses towards non-taxable income must be excluded. A perusal of the provisions of section 5(1) of the Act provides for the scope of the total income. It includes all incomes from whatever source derived which is received or deemed to be received, accrues, arises or is deemed to accrue or arise in India or accrues or arises outside India during "such year". Thus what is to be understood is that the total income is relating to such year. If the assessee does not have any income as falling within the scope of "total income" during any year the provisions of the Act could not be applied to him. A perusal of the provisions of section 14A clearly shows that the words used therein are "for the purpose of computing the total income under this Chapter, ......expenditure incurred in relation to income which does not form part of the total income under this Act." Thus for the applicability of section 14A there must be (i) income which is taxable under the Act for the relevant assessment year and (2) there should also be income which does not form part of the total income under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombay High Court in the case of Godrej Boyce Mfg. Co. Ltd., referred to supra, and is also supported by the view expressed by the Punjab Haryana High Court in the case of Winsome Textile Industries Ltd. The other decisions relied upon by both the sides are not being discussed as they are found to have no specific relevance to the issue in the appeal before us. 9. In regard to the second issue it was submitted by the learned authorised representative that the assessee had granted a loan of Rs. 50 crores to its subsidiary in Mauritius for the purpose of making investments and has charged interest @ 6 per cent per annum. The issue was referred to the TPO. Before the learned TPO it was submitted that the average of 12 months US$ denominated LIBOR rate for the period 1-4-2005 to 31-3-2006 was 4.42 per cent and consequently no addition on account of the arm's length interest rate was liable to be made. It was the submission that the Assessing Officer had taken a view that the US$ denominated LIBOR rate could not be considered as the loan was given from India and the prime lending rate in India was to be considered. It was the submission that consequently the Assessing Officer had d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted. 12. In regard to the third issue it was submitted that the Assessing Officer has not granted TDS credit as claimed by the assessee. It was the submission that before the DRP the issue had been raised and the DRP called for a remand report and the remand report was received on 27-8-2010 as per para 16 of its order and the remand report had not been granted for its rebuttal. It was the submission that the assessee had no objection if the issue was restored to the file of the Assessing Officer for re-verification to grant the assessee opportunity to rectify any defects ..... X X X X Extracts X X X X X X X X Extracts X X X X
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