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TMI Blog2017 (3) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... e’ - appellant has not ‘maintained data systematically’.assessee has claimed that gross sales had increased over the years. It was further held that if estimate was made on a scientific basis, same could be allowed. In the matter before us, scientific data is not available.- decided against assessee Recomputation of disallowance u/s 14A of the Act r.w.r. 8D of the Rules after excluding the long term capital investment in subsidiary/group concerns - Held that:- We have considered the rival submissions and perused the material available on record. We find that while coming to a conclusion, the Ld. Commissioner of Income Tax (Appeal) has deliberated upon the factual matrix and various case laws including from Hon'ble jurisdictional High Court and the Tribunal. We find no infirmity in the same. So far as, the contention of the ld. DR that the order of the Tribunal is under challenge before the Hon'ble High Court, is concerned, we are of the view that order of the Hon'ble High Court will be binding upon both the parties but as on date the issue is in favour of the assessee, therefore, we dismiss the appeal of the Revenue. - ITA NO.3231/Mum/2015, ITA NO.3526/Mum/2015 - - - Dated:- 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 260A of the Income Tax Act, 1961 ( Act ) against the order dated 4th January, 2013 passed by the Income Tax Appellate Tribunal ( ITAT ) in ITA No.87/DEL/2008 for the Assessment Year ( AY ) 2004-05. 2. Admit. 3. The following substantial question of law is arises for determination: Whether disallowance under Section 14A of the Act can be made in a year in which no exempt income has been earned or received by the Assessee? 4. The Appellant is engaged in the business of making investment in shares and accepting/granting of loans. The Assessee is one of the copromoters of Max India Ltd. 5. In the AY in question, the Appellant borrowed funds on which interest expenditure of ₹ 1,21,03,367/- was incurred. The factual assertion of the Appellant, which has not been controverted, is that in the relevant AY no dividend income was earned by the Appellant from the amount invested in various shares. For the AY in question, the Appellant filed a return of income declaring a loss of ₹ 13,84,086/-. This case was picked up for scrutiny and the Assessing Officer (AO) completed the assessment under Section 143(3) of the Act disallowing ₹ 97,87,570/- out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 97,87,570 9. The CIT (A) by an order dated 27th September 2007 upheld the applicability of Section 14A of the Act but agreed with the contention of the Appellant that only the net interest amount debited in the profit and loss account was required to be proportionately disallowed under Section 14A of the Act. 10. In the appeals filed both by the Revenue and the Assessee before the ITAT, a Special Bench was constituted to decide the question regarding applicability of Section 14A of the Act in an year when no exempt income had been earned. The Special Bench by an order dated 5th August 2009 answered the question by inter alia referring to the decision of the Supreme Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). The reasoning of the Special Bench was as under: 22. The controversy raised in this case is that the assessee had not earned or received any dividend in the year under consideration and, therefore, no disallowance can be made by invoking the provisions of Section 14A of the Act. We do not find any force in this contention of the assessee. When the expenditure of interest is incurred in relation to income which does not form part of total income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties to also address the issue of whether the interest paid on borrowings for the purposes of investment by the Assessee could be treated as business expenditure? 14. Mr. Vohra has placed before the Court a large number of decisions including the decision of this Court in Eicher Goodearth Ltd. v. Commissioner of Income-tax [2015] 60 taxmann.com 268 (Delhi) which answered the question in the affirmative. Mr. Vohra has also placed reliance on decisions of the Supreme Court in CIT v. Chugandas Co. [1964] 55 ITR 17 (SC) and CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC) which hold that where shares were held as business investment, the dividend income though assessable to tax under the head income from other sources, would retain its character as business income for all intents and purposes. In the latter decision it was specifically held that the income from securities which forms part of the Assessee s trading assets or part of its income in business if loss incurs in business would be set off against that income in succeeding years. Mr. Vohra pointed out that even in the Assessee s case the business loss of previous year has been set off against the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax. 17. On facts, it was noticed in CIT v. Holcim India (P) Ltd. (supra) that the Revenue had accepted the genuineness of the expenditure incurred by the Assessee in that case and that expenditure had been incurred to protect investment made. 18. In the present case, the factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the Assessee is in relation to such investments which gives rise to income which does not form part of total income. 19. In light of the clear exposition of the law in Holcim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 57(iii) of the Act, where the expression used is for the purpose of making or earning such income . Section 14A of the Act on the other hand contains the expression in relation to income which does not form part of the total income. The decision in Rajendra Prasad Moody (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act. 22. In the impugned order, the ITAT has referred to the decision in Maxopp Investment Ltd. (supra) and remanded the matter to the AO for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd. (supra)was whether the expenditure (including interest on borrowed funds) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was disallowable under Section 14 A of the Act. In the said case admittedly there was dividend earned on such investment. In other words, it was not a case, as the present, where no exempt income was earned in the year in question. Consequently, the said decision was not relevant and did not apply in the context of the issue projected in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TTJ (Del.)(SB) 577) order dated 5/8/2009. 3. We have considered the rival submissions and perused the material available on record. The facts in brief are that at the relevant time the Assessee firm was engaged in the business of cotton trading along with business of import of certain special chemicals from Germany/Switzerland and sold in the local market. It was observed by the AO that the borrowed fund on which interest was paid was used for investment relating to income exempt from taxation, consequently, the AO computed disallowance u/s. 14A r.w. Rule 8D of the Income Tax Rules resulting into disallowance of ₹ 10,12,366/-. 3.1 The aggrieved Assessee preferred appeal before the ld. CIT(A) wherein following the Special Bench decision in the case of Cheminvest Ltd. Vs. ITO (supra), affirmed the view taken by the AO. We note that the Special Bench while coming to a particular conclusion held that when the expenditure of interest is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether an income is earned by the Assessee or not. In this decision it was also held that section 14A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsome Textile Industries lts. Reported at (2009) 319 ITR 204 (P H) has held that in the present case, admittedly, the Assessee did not make any claim for exemption. In such a situation, sec.14. A could have no application. In this case also, the Assessee has not claimed any exempt income in this year. Therefore, respectfully following the judgement of Hon ble Punjab Haryana High Court in the case of CIT vs. Winsome Textiles Industries Ltd. (supra), we hereby allow this ground and direct the AO to delete the addition . 3.3 In another case Hon ble Bombay High Court in CIT vs. Delite Enterprises(Tax Appeal No.110 of 2009 order dated 26 Feb. 2009) , Hero Cycles Ltd. (320 ITR 518) and M/s. Lakhani Marketing Incl (ITA No.970 of 2008) dated 2/4/2014 and CIT vs. Winsome Textile Industries Ltd. (319 ITR 204) from Hon ble Punjab Haryana High Court held that where there is no claim for exemption of income in such situation sec. 14A has no application. In the present appeal also since the Assessee company has not claimed any exempt income during the year, therefore, there is no question of disallowance of expenditure. Respectfully following the aforesaid decisions we delete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation of the details furnished by the assessee, it is noticed that the expenses include provisions of ₹ 10, 10,378/-. He directed the assessee to file justification for the claim. After considering the reply of the assessee dated 3.9.2007 ,he held that the contention of the assessee was not acceptable, that as per section 37(1), any expenditure (not being in the nature of capital expenditure or personal expenditure) laid out or expended wholly and exclusively for the purpose of business, should be allowed, that for claiming deduction amount in question should have been laid out or expended during the previous year ,that the assessee had not incurred the expenditure during the year under consideration, that it had not furnished the basis of estimate of the liability, that the amount claimed was nothing but a provision for future expenditure that might or might not be incurred, that contingent liabilities did not constitute expenditure and could not be the subject matter of deduction even under mercantile system of accounting. Finally, he made a disallowance of ₹ 10.10 lacs . 2.1.Against the order of the AO, assessee preferred an appeal before the First Appeal Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, that provision made was reasonable considering the sales. He referred to page no.1,11,12of the Paper-Book (PB).He relied upon the judgment of the Hon ble Supreme Court delivered in the case of Rotork Controls India Pvt. Ltd.(314ITR62).He also referred to the order of the Bangalore ITAT delivered in the case of Lenovo (India)Pvt. Ltd.(21Taxmann.com.256).Departmental Representative (DR) submitted that no scientific basis for calculating warranty was provided by the assessee, that actual expenditure had gone down with the increased sales, that there was no direct relation with the sale, that provision was ad-hoc and could not be allowed. He relied upon the case of Micro Land India Ltd. (18taxmann.80- High Court of Karnataka). 2.3.We have heard the rival submissions and perused the material before us. Expenditure incurred by an assessee for warranty liability is allowable expenditure, provided it is covered by the principles enumerated by the Courts, from time to time, in this regard. As per the established law warranty liability can be considered part and parcel of the sale and might be allowed in computing the taxable income. But, for claiming the allowance one has to furnis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. We have perused the judgments delivered by the Hon ble Apex Court delivered in the case of Rotork Controls India Pvt. Ltd. (supra).In our humble opinion that case rather supports the views expressed by the AO and the FAA. We find that in the submissions made by the assessee historical trend of warranty provisions sensible estimate and yearly reassessment of such estimates were existing. In other words assessee has not maintained data systematically , as desired by the Hon ble Supreme Court. In the case of Lenovo (India) Pvt. Ltd.(supra)assessee company had taken over business from IBM. Considering the above fact Tribunal held that as IBM was making provisions in earlier years, so assessee can use the data for warranty expenditure. It was further held that if estimate was made on a scientific basis, same could be allowed. In the matter before us, scientific data is not available. In these circumstances we hold that there is no need to interfere with the order of the FAA. Upholding his order we decide ground no.1 against the assessee. In the light of the above, in principle, we decide this issue against the assessee, however, we direct the ld. Assessing Officer to e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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