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TMI Blog2015 (12) TMI 972X X X X Extracts X X X X X X X X Extracts X X X X ..... Brokers P. Limited's case (2010 (7) TMI 15 - SUPREME COURT ), it held that the assessee was entitled to set off loss from transactions against its other Income chargeable to tax. The said view was affirmed by the High Court. The question before the Apex Court was whether loss arising in the course of dividend stripping transaction taking place prior to 1.4.2002 was disallowable on the ground that such loss was artificial as the dividend stripping transaction was not a business transaction. After examining the legal and factual position therein, it was held that in cases arising before 1.4.2002, losses pertaining to exempted income could not be disallowed. Such is not the position in the present case. - Decided against the revenue - ITA No.185 of 2013 - - - Dated:- 1-10-2015 - MR. AJAY KUMAR MITTAL AND MR. RAMENDRA JAIN, JJ. For The Appellant : Mr. Vivek Sethi, Advocate For The Respondent : Mr. Ajay Vohra, Sr. Advocate with Mr. Gaurav Jain, Advocate Ajay Kumar Mittal,J. 1. The appellant-revenue has filed this appeal under Section 260A of the Income Tax Act, 1961 (in short, the Act ) against the order dated 8.3.2013, Annexure A.3 passed by the Income Tax Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal. The revenue also filed appeal against the order of CIT(A) before the Tribunal. Vide order dated 8.3.2013, Annexure A.3, the Tribunal allowed the appeal of the assessee and dismissed the appeal filed by the revenue. Hence the instant appeal by the revenue. 3. We have heard learned counsel for the parties. 4. Learned counsel for the revenue submitted that the order passed by the Tribunal is illegal and perverse in holding that no disallowance could be made under Section 14A of the Act unless a clear cut nexus was established between the expenses disallowed and the income earned. Reliance was placed upon judgment of the Apex Court in Commissioner of Income Tax vs. Walfort Share and Stock Brokers P. Limited, (2010) 326 ITR 1. 5. Learned counsel for the assessee relied upon CIT vs. Metalman Auto P. Limited, (2011) 336 ITR 434 and CIT vs. Hero Cycles Limited, (2010) 323 ITR 518 to submit that the revenue was under obligation to show that certain definite expenditure was claimed by the assessee in respect of which the income of the assessee was exempt. In the absence of the same, no expenditure could be disallowed on estimate basis. It was further submitted that sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its expenses towards its investment activities and monitoring of these investments. Besides these expenses, large part of expenditure and energies of the treasury division of the company are also devoted towards these investments. The assessee replied to it vide letter dated 29.3.2004 and its submissions regarding this can be summarized as under i) The direct expenses of one particular investment, related to atleast, in the form of foreign travelling has not been claimed by the assessee as revenue expenditure. The assessee was not able to divide its expenses into those relatable to its running of businesses and those relatable to protecting and planning its investments. ii)The total expense on salaries of directors and travelling is only around ₹ 80 lacs. The directors are not devoting much time to the investment activities. iii)The assessee claimed that only the expenses incurred for earning the income i.e. specific to the securities on which dividend has been received, is disallowable. iv)The assessee's contentions have been gone through and are rejected in view of the following a) Section 14A talks about expenditure incurred by assessee in relation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the total income will not be allowed. A judgment of the Hon'ble Supreme Court in the case of Distributors (Baroda) Private Limited vs. Union of India 155 ITR 120 throws light on this issue. The Hon'ble Supreme court had held that in order to compute income from dividend, interest on moneys borrowed for earning such income is to be deducted. In view of the above, I hold that provisions of Section 14A are applicable on the facts of the present case. But having held that a disallowance under Section 14A is called for, I feel that the AO has clearly erred in making a whopping adhoc disallowance for ₹ 1.50 crores. The AO has not discharged the onus of proving what amount had been incurred for earning the dividend income before making the disallowance. Further, to link the disallowance with the amount of investment is also not rational since making investment is not a regular activity and involves continuous monitoring. Moreover, the appellant has itself disallowed the direct expenditure incurred on investment activities. Further, since the appellant has been running a number of operating divisions like pharmaceutical, BOPP, Maxfoil, Metaliser and Healthcare, conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of the Act, aggregated to ₹ 36.01 crores. The break up of the aforesaid investments is as under (PB87-88 of supplementary PB): Nature of investment Amount in Rs. And crores Foreign subsidiaries Max Asia Pac Limited 11.33 Max UK Limited 2.13 Max Visions Inc. 0.95 BONDS Reliance Zero Coupon Bonds 6.1 HDFC Bonds 0.62 MTNL Limited 0.57 Reliance Petroleum 3.31 Units in Growth Scheme Kothari Pioneer Maxima Fund 10 DSP MerryL Lynch Balance Fund Growth 1 Total 36.01 In view thereof, the interest expenditure incurred on borrowed funds, if any attributable to the aforesaid investments, income wherefrom is not exempt under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipulated that proceeds of NCD (interest bearing) were not utilized for investment in shares of group companies of joint ventures. The aforesaid object was to be met out of the proceeds of zero coupon FCDs. The relevant portion of the aforesaid note reads as under:- As per the SEBI guidelines for disclosure and investor protection clarification II, the proceeds of NCD issue cannot be utilized for acquisition of shares and/or providing loan to any company belonging to the same group. In line, with above, company's requirements for investments into joint ventures in Phase I, is proposed to be met through the proceeds of FCD issue and/or preferential issue of warrants to the management group. In view of the above, no portion of the interest bearing NCD was utilized towards investment in shares of MTVL, a group company of the assessee. Further, as is evident from the case flow statement of the year ending 31.3.1996, against the aforesaid aggregate interest bearing borrowing of ₹ 40.33 crores (from NCD), the assessee had acquired fixed assets from an amount of ₹ 35.20 crores and repaid existing loans of ₹ 6.38 crores. In that view of the matter, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, no disallowance under section 14A of the Act could have been made for the assessment year under consideration. 10. A perusal of the findings recorded above shows that in the opinion of the Assessing Officer, under Section 14A of the Act, no deduction was allowable in respect of expenditure incurred by the assessee in relation to the income which did not form part of total income under the Act. Further the expenditure incurred in relation to investments which were for earning dividend Income but during the year did not yield any dividend, was not allowable. The expenses like conveyance, travelling, telephone and other incidental expenses were relatable to earning of exempt income. Therefore, an amount of ₹ 1.50 crore was apportioned as being in relation to such exempt income and was disallowed under Section 14A of the Act. On appeal by the assessee, the CIT(A) did not agree with the findings recorded by the Assessing Officer. It was observed by the CIT(A) that since the assessee had been running a number of operating divisions like pharmaceutical, BOPP, Maxfoil, Metaliser and Healthcare, considerable time of the corporate office employees could be expected to be spent o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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