9911796707
TMI Blog2016 (11) TMI 1012X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. would not necessarily be recorded in writing. Advice, introductions, information may well be communicated orally. The possibility of this is enhanced on account of the fact that these are group companies. Even if each of the facts by itself does not support the Tribunal’s conclusion taken together they certainly do. The Tribunal has, therefore, taken a possible view.- Decided in favour of assessee X X X X Extracts X X X X X X X X Extracts X X X X ..... income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which 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." 6. The Assessing Officer rejected the assessee's contention that it had not incurred any expenditure for the purpose of earning the exempt income observing that the possibility of the assessee having incurred expenditure relatable to such exempt income could not be ruled out. The Assessing Officer held that on identical facts for the Assessment Year 2001-02, ad hoc disallowance relatable to such expenditure incurred for the purpose of earning exempt income was made and on the same basis he made a disallowance of ₹ 1.5 crores under Section 14A. The assessee contended that the investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls) analysed each of the documents. It was observed that in the absence of the bank books and bank statements it was not possible to determine whether the assessee had received free funds available at the time when the relevant investment was made or whether the said investment was made out of interest bearing funds and that as the finding about the utilization of funds can be made from a direct study of the books of accounts and the relevant bank statement, a presumption is liable to be drawn against the assessee in this regard. The assessee's contention that the bank statements were not readily available was not accepted. It was observed that the appellant was otherwise able to produce and submit details of all matters relating to the proceedings in respect of other grounds but had not produced the bank statements or the bank books. It was further observed that the bank statements alongwith bank books were in the exclusive custody of the assessee and could lead to a finding that the assessee utilized borrowed funds for the purpose of making investments. These facts were, therefore, in the special knowledge of the assessee. The documents being in the custody of the assessee and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would utilize the funds to the maximum advantage which in cases such as these would lead to making investments for the operational assets first out of interest bearing funds. 11. The CIT (Appeals) thereafter analysed various loan agreements. Some of the conclusions were as follows: Though in some cases there are specific covenants about the use or non-use of funds for investment in shares, there is no such stipulation in respect of many of the other borrowings by the assessee. Some of the repayments were linked to the sale of shares by the assessee which sale proceeds would not be available for the purpose of immediately making fresh investment. The assessee's contention that there was a specific covenant in respect of the loan agreements that the loans could be utilized for business purposes only is not borne out from the documents placed on record. The CIT (Appeals) concluded as under:- "10.3 In the light of the facts noted earlier and in the absence of details, a reasonable basis for the disallowance out of interest expenditure would be to consider that both interest bearing and non-interest bearing funds available with the assessee have been used in all the assets in their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied Investments (Rs.) I=H*F 43294905 The amount disallowable u/s 14A on account of interest expenditure is thus, computed at ₹ 4,32,94,905/-." The above conclusion of the CIT (Appeals) is in respect of the utilization of the funds namely the funds borrowed on interest and the interest free funds available with the assessee. The CIT (Appeals) also dealt with the disallowance on account of the administrative expenses. It was contended that the investments were handled only by the treasury division on which a small part of expenditure on personnel was incurred by the assessee. The CIT (Appeals), however, estimated the administrative expenditure relating to the investment from which exempt income was earned to be ₹ 20 lacs during the relevant previous year. Accordingly, the disallowance under section 14A was computed at ₹ 4,52,94,905/- which was the sum of ₹ 4,32,94,905/- and ₹ 20,00,000/- respectively. This, therefore, replaced the disallowance of ₹ 1.50 crores made by the Assessing Officer. The Assessing Officer was directed to consider the amounts of disallowance also for computing the income and tax liability under section 115JB of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s amount was available during the relevant previous year. Thus such funds were in excess of the investment of ₹ 123.87 crores. In addition thereto the assessee had generated cash from its financing activities of an aggregate amount of ₹ 24.24 crores. It had purchased fixed assets aggregating only to ₹ 54.62 crores during the relevant period. The findings, therefore, that the assessee had sufficient interest free funds to make the investment yielding tax free returns cannot be faulted. The absence of bank books in these circumstances would not justify an adverse inference being drawn for whichever way the matter is viewed, the assessee had sufficient funds available to it on which no interest was payable. This brings us to the legal issue of a presumption to be made when there is a pool of funds which include interest bearing funds and interest free funds. 15. Mr. Vohra's reliance upon the judgment of the Supreme Court in East India Pharmaceutical Works Ltd. v. Commissioner of Income Tax 1997 Income Tax Reports 224 (SC) is well founded. The Tribunal referred the following question to the High Court:- "Whether, on the facts and in the circumstances of the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than 14 years, the principle of stare decisis should be made applicable and, therefore, it must be held that the High Court committed error in not accepting the assessee's contention………………………. 4. Having considered the rival submissions at the Bar though we find considerable force in the arguments advanced by the learned counsel appearing for the appellant but in the facts and circumstances of the present case, on going through the order of the Tribunal as well as the question referred to by the Tribunal for being answered by the High Court and the arguments advanced before the Tribunal as well as in the High Court by the counsel appearing for the assessee, it is not possible for us to hold that any such contention, as was advanced before this Court by the assessee had in fact been advanced either before the Tribunal or before the High Court. The question whether a presumption can be drawn that the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business as was drawn in Woolcombers case [(1982) 134 ITR 219 : (1981) 23 CTR 204 (Cal)] by the Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid case the Court did not express any opinion on the question whether the interest paid on money borrowed for payment of tax was allowable as business expenditure. To the same effect is the decision of the Calcutta High Court in Alkali Chemical Corpn. of India Ltd. [(1986) 161 ITR 820 (Cal)] ……………emphasis supplied." 16. It may be said that this was a case where the funds were all in a common pool viz. in the overdraft account. It would, however, make no difference even if the funds are in different accounts. The presumption would still apply so long as the interest free funds are available. Our view is supported by the judgment of a Division Bench of the Bombay High Court in Commissioner of Income Tax v. Reliance Utilities and Power Ltd. 2009 (313) ITR (Bombay), where it was held:- "If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interestfree funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT, [1997] 224 ITR 627 had the occasion to consider th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from the investment and securities which were exempt from tax. It treated these investments as stock in trade. The petitioner had during that year paid interest on borrowed funds and claimed the same as expenditure. The petitioner claimed that the investment in tax free securities was made out of its own tax free funds and therefore no disallowance could be made under section 14A. The petitioner contended that it was possessed of sufficient interest free funds of ₹ 2153 crores as against the investment in tax free securities of ₹ 52.02 crores and that there was a presumption that the investment which had been made in the tax-free securities had come out of the interest-free funds available with the petitioner. The Division Bench held:- "15. It is clear that for the first time in the case of HdFC Bank Ltd. (supra) that this Court took a view that the presumption which has been laid down in Reliance Utilities and Power Ltd. (supra) with regard to investment in tax free securities coming out of assessee's own funds in case the same are in excess of the investments made in the securities (notwithstanding fact that assessee concerned may also have taken some funds on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not have the benefit of the order of this Court in HDFC Bank Ltd. (supra) rendered on 23rd July, 2014. Once the issue is settled by the decision of this Court in HDFC Bank Ltd. (supra), there is now no need for the assessee to establish with evidence that the amounts which has been invested in the tax free securities have come out of interest free funds available with it. This is because once the assessee is possessed of interest free funds sufficient to make the investment in tax free securities, it is presumed that it has been paid for out of the interest free funds. Consequently, we do not find any merit in the above submission made at the hearing on behalf of the Revenue. …..emphasis supplied" We respectfully agree with these observations. While it is only a presumption, it is one which is in the assessee's favour. The Department could have rebutted this presumption by calling for the records from the bank itself. It chose not do so at though the assessee stated that it was not in possession of the records. There was no application either before the Tribunal or before us for an opportunity to lead further evidence in this regard. 18. A similar view was taken by the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... collaborator/partner and further upon completion of due diligence as aforesaid, render further assistance to MAX for establishing contact with such potential collaborators/parties and further provide necessary interface and transactional services for facilities/consummating the collaboration/joint venture arrangements; and (f) other support services, as may be required, from time tome." 23. There is some discrepancy regarding the pound sterling equivalent to the Indian rupees that were paid. This need not detain us as it not relevant for this judgment. The parties proceeded on the basis that the amount paid was ₹ 1.25 crores and in respect of which the assessee sought a deduction. On queries raised by the Assessing Officer, the assessee contended that it had also entered into an agreement with M/s Max UK Ltd. for other services and that the amount of ₹ 1.25 crores was included in the legal and professional expenses of its corporate office aggregating to about ₹ 2.12 crores. In support of his contention that the services were infact rendered and from which the assessee benefited, the assessee relied upon the fact that its total exports were in excess of ₹ 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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