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TMI Blog2008 (5) TMI 693X X X X Extracts X X X X X X X X Extracts X X X X ..... terial from where funds are borrowed into the assessee company or whether those funds were held by any other companies which merged into the assessee company and finally as a result of merger assessee company look over the assets and liabilities including the liability of borrowed funds and thereby committing to make payments of financial charges in respect of such borrowed funds. Similarly, where dividend income is earned from the shares then such income would be taxable in the hands of the assessee in subsequent years when dividend income is held taxable. In any case, the taxability of exemption of dividend income has to be examined only in the hands of assessee company in the light of Section 10(33)/115O of the Act. Similarly, claim of expenditure: in relation to such exempted income will have to be examined in the hands of assessee company. Therefore, the first argument of the Assessee is rejected. Whether expenditure was actually incurred or not also does not arise. Once expenditure is actually incurred then the only question that remains to be (sic) whether it can be allowed against other business income if no dividend income is earned? - HELD THAT:- Merely because th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome would not be allowable as deduction against other income, the expenditure will not be allowed to be set off against other business income as it is incurred in relation to dividend income which is not includible in the total income. Further for the purposes of allowability or disallowability of such expenditure it is immaterial whether any income (which is exempt Under Section 10(33)) is actually earned or not. As a result, we allow the appeal of the Revenue. - D.C. AGRAWAL, ACCOUNTANT MEMBER AND O.P. SHUKLA, JUDICIAL MEMBER ORDER D.C. AGRAWAL, ACCOUNTANT MEMBER 1. This is an appeal filed by the Revenue against the order of the ld. CIT(A) allowing the claim of the assessee for a sum of ₹ 34,92,373/- being interest paid by the assessee on borrowed funds which were invested in shares for earning dividend income. 2. The Revenue has raised following grounds: 1. The ld. CIT(A)-I, Kanpur has cried in law and on facts in deleting the addition of ₹ 34,92,373/- made Under Section 14A of the Act, 1961 on account of expenditure on interest paid on borrowed funds because the investment made in sister concern generated only dividend which did not form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 10,94,98,600/- 5. Thus an investment of ₹ 10,94,98,600/- was made into the shares of various companies as above. The assessee company debited in the consolidated profit loss account, following expenses as financial charges: Amount Bank charges (P.H.) 1,150.00 Bank Charges (MRI) 11,998.00 Bank Charges (RDHL) 1,745.68 Finance charges (MRI) 8,99,962.79 Interest bank charges (Ratan Apartment) 90,279.05 Interest Bank charges (S. Build.) 23,97,277.86 Interest Bank charges (P.H) 89,959.53 Total 34,92,372.91 6. The AO required the assessee to explain why not the financial charges of ₹ 34.92,373/- be disallowed within the meaning of Section 14A. The assessee submitted that a sum of ₹ 5,92,50,000/- was given to M/s Raj Ratan Castings Pvt. Ltd. out of the funds transferred from the merged compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Ltd., which has been amalgamated with the appellant company w.e.f. 1.4.2003 and balance investment of ₹ 1,55,80.000/- have been made by the amalgamated company through cheques. The investment in shares of M/s Raj Ratan Castings Pvt. Ltd. have not been made in order to earn the dividend income. In fact, such investments have been made to have controlling stake in the company viz. M/s Raj Ratan Castings Pvt. Ltd. The criteria of commercial expediency, as laid down by the Supreme Court in ratio of judgment supra, is certainly satisfied in the present case. The AO has committed the factual mistake in disallowing ₹ 34.92,373/-, as this amount represents finance charges and interest of merging entities. The AO has not established that the money borrowed by the. appellant company is for the purpose of making investments in purchase of shares of Raj Ratan Castings Pvt. Ltd. Even otherwise, if money was borrowed for the purpose of investment in shares in order to have controlling stake in a company, in such situation, the interest would be an allowable deduction, as such event would certainly satisfy the test of commercial expediency as laid down by the Supreme Court in the j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The first issue which requires consideration is whether it would make any difference to the application of Section 14A if the borrowed funds were earlier accounted for in the merged companies and after merger they are accounted for in the assessee company. In our considered view, it will not make any difference in the applicability of Section 14A in the case of assessee company. It is undisputed fact that the claim of expenditure amounting to ₹ 34.92,373/- is debited in the accounts of the assessee company, therefore, allowability of this claim has to be examined only in the hands of assessee company. It is immaterial from where funds are borrowed into the assessee company or whether those funds were held by any other companies which merged into the assessee company and finally as a result of merger assessee company look over the assets and liabilities including the liability of borrowed funds and thereby committing to make payments of financial charges in respect of such borrowed funds. Similarly, where dividend income is earned from the shares then such income would be taxable in the hands of the assessee in subsequent years when dividend income is held taxable. In any ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure incurred in earning those receipts has to be debited on the other side. The net income therefrom will have (sic) for taxation according to the provisions of the Act (sic) is treated as exempt by any provision of the Act, it could not (sic) tax. In case if income is a negative figure from a particular (sic) income earned from that source is less than expenditure (sic) such income then the loss resulting therefrom could be (sic) with the provisions of the income-tax Act, 1961 (sic) source or other heads. For this purpose, the provisions as (sic) Sections 71, 72, 73, 74 74A have been enacted. Adjustment (sic) from any source or under any head of income can only be done in accordance with these provisions. Further, if assessee is not able to earn any income under any head or from any source, but incurs expenditure and it is proved that activities for earning income have been carried out by the assessee then notwithstanding that any income has not been earned the expenditure incurred in earning such income will be considered as a loss under that head or from that source and that would be considered for set off against income from other source or under other heads. For the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment as under: The plain natural construction of the language of Section 57(iii) of the I.T. Act, 1961, irresistibly leads to the conclusion that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What Section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section docs not require that this purpose must be fulfilled in order to qualify the expenditure for deduction: it does not say that the expenditure shall be deductible only if any income is made or earned. Where the assessee borrowed monies for the purpose of making investment in certain shuns and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those monies: Held, accordingly, that the interest on monies borrowed for investment in shares which had not yielded any dividend was admissible as a deduction under Section 57(iii) of the Income-tax Act, 1961, in computing its income from dividend under the head Income from other sources. What Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat if no dividend income is received then it would not make any difference in set off of expenditure incurred for the purpose of earning such income. In this regard, we refer to relevant head notes as under: The assessee harrowed a term loan but was unable to utilise the loan amount for the project for which it was sanctioned. The entire loan amount was invested in shares in two companies with which the assessee had business relations. The Assessing Officer disallowed the claim of interest on the loan under Section 36(1)(iii) of the Income-tax Act, 1961, on the ground that the loan was not utilised for the purpose of the business. The alternative claim for deduction under Section 57(iii) was also disallowed by the Assessing Officer. This was upheld by the Commissioner (Appeals). The Tribunal allowed the claim of the assessee both under Section 36(1) (iii) and in the alternative the claim under Section 57(iii). On a reference: Held, that in the memorandum and articles of association of the assessee, investment in shares was specified and the assessee under law could be treated to be doing the business of investment in shares. Even otherwise the assessee had earned dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8, wherein it was held as under: that trading profits for the purposes of income and corporation tax were to be computed on a basis that gave a true and fair view of the taxpayer's profits or losses in the relevant period ; that the determination of profit for an accounting year required the matching of costs with related revenues... 21. The Hon'ble Supreme Court in the case of J.K Industries v. Union of India MANU/SC/8111/2007, recognized this matching principle. 22. Section 14A reads as under: [Expenditure incurred in relation to income not includible in total income. 14A. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee 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 Offices 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]. 23. The h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation thereto could not be set off against other taxable income. In a similar situation, Hon'ble Supreme Court in Rajendra Prasad Moody's case (supra) observed that such a result is highly strange and anomalous. Observation of Hon'ble Apex Court in this regard are as under: It is also interesting to note that, according to the revenue, the expenditure would disqualify for deduction only if no income results from such expenditure in a particular assessment year, but if there is some income, howsoever small or meagre, the expenditure would be eligible for deduction. This means that in a case where the expenditure is ₹ 1,000. if there is income of even He. I, the expenditure would be deductible and there would be resulting loss of ₹ 999 under the head Income from other sources . But if there is no income, then, on the argument of the revenue, the expenditure would have to be ignored as it would not he liable to be deducted. This would indeed he a strange and highly anomalous result and it is difficult to believe that the legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome has to be carried out separately under a separate head. The expenditure relating thereto has to be accounted for as per Section 57(iii). This computation may lead to a positive income or may lead In negative income depending upon whether receipts are higher or expenditure is higher. Even if there is no income from dividend still then expenditure relating there to will have to be accounted for Under Section 57(iii) only. If dividend income is not exempt then loss arising as a result of computation of dividend income under the head 'income from oilier sources' will fall for set off against 'other income'. It dividend income is exempt Under Section 10(33) of the Act then loss arising as a result of computation of dividend income would not be available for set off by virtue of Section 14A. In other words, by computing dividend income in accordance with Sections 56 to 59 -under the head 'income from other sources' the resulting figure, whether positive or negative, will be considered as exempt Under Section 10(33) i.e. it will not be available for inclusion while computing total income of the assessee. 27. The decision of ITAT SMCI Bench in the case of Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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