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TMI Blog2024 (8) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... 805 - SUPREME COURT] and South Indian Bank Limited [ 2021 (9) TMI 566 - SUPREME COURT] afore-quoted. We are of the view that since the impugned order of the ITAT suffers from perversity and examination of facts needs to be made by the fact finding authority i.e., the AO with regard to apportionment or proportionate disallowance, therefore on the aforequoted substantial question of law No.(1) the case deserves to be remanded to the assessing officer. The substantial question of law No.(1) is answered accordingly and the matter is remanded to the assessing officer for apportionment or proportionate disallowance of the interest incurred as expenditure, to the extent related to the tax free interest on bonds. Deduction u/s 80M - deduction from the unit dividend income as interest expenditure incurred in relation thereto and consequent reduction of relief u/s 80M - HELD THAT:- As in Distributors (Baroda) Pvt. Ltd. [ 1985 (7) TMI 1 - SUPREME COURT] the Constitution Bench of Hon ble Supreme Court held that deduction under Section 80M is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of gross total inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 as interest expenditure incurred in relation to exempt of income from tax free bonds ? 2) Whether the learned Tribunal below committed substantial error of law in upholding the deduction of Rs.41,03,833/- from the unit dividend income as interest expenditure incurred in relation thereto and consequent reduction of relief under section 80M of the Income-tax Act, 1961 by Rs.24,62,300/- was arbitrary, unreasonable and perverse ? 4) Whether the learned Tribunal below committed substantial error of law in rejecting the ground taken by the appellant against interest under section 201(1A) of the Act, amounting to Rs.10,48,423/- charged in the order under section 143(3) of the Act and in not considering and deciding the appellant s contention that no interest was chargeable in view of the provisions of Rule 119A(a) of the Income-tax Rules, 1962 ? Facts : - 3. Briefly stated facts of the present case are that for the assessment year 1990-91 the assessing officer passed an assessment order dated 31.3.1993 whereby he disallowed interest on borrowed capital under Section 14A of the Income Tax Act, 1961 (hereinafter referred to as the Act, 1961 ), allowed lesser deduction under Section 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e., tax-free interest on bonds could be disallowed and could be subjected to tax as income in the hands of the assessee. iii) Section 80M read with Section 80AA of the Act, 1961 provides for deduction @ 60% on the income by way of dividend from a domestic company. Therefore, the entire amount received as dividend was the income from dividend and, as such, deduction under Section 80M was allowable on the entire amount of dividend. Reliance is placed upon a co-ordinate Bench judgment of this Court in Commissioner of Income Tax vs. National and Grindlays Bank Ltd. reported in (1993) 202 ITR 559 (Cal) and Commissioner of Income Tax vs. Kanoria Investments (P) Ltd. reported in (1998) 232 ITR 7 (Cal) and a judgment of the Hon ble Supreme Court in Maxopp. Investment Ltd. vs. Commissioner of Income Tax, reported in (2018) 301 CTR (SC) 489. iv) Imposition of interest under Section 201(1A) by the assessment order was totally illegal as neither a separate order was passed by the assessing officer for interest under Section 201(1A) nor any opportunity of hearing was afforded nor any reasons have been recorded while imposing interest under Section 201(1A) of the Act, 1961. ITAT has held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee is engaged in the business of manufacture, supplies, exports, erections, installations and commissioning of wide range of cooling towers etc., manufacture, supplies and export of high density polypropylene woven bags for use in packing of fertilisers, cement, chemicals, grains etc. and investment in stocks of securities from time to time. As per book results, the total sale of the assessee including sales of bonds of public sector undertakings and units of UTI was Rs.14,722.56 lakh resulting in a net profit of Rs.973.61 lakh which includes tax-free interest on bonds. After reducing the amount of taxfree interest on bonds, the net profit came to Rs.7,67,70,836/- as mentioned by the assessing officer in the computation part of the assessment order. This net profit was arrived after deducting interest on borrowed capital said to have been utilised for investment in units of UTI which was (interest amount) Rs.4,03,833/-. The assessing officer has not disallowed the interest claimed as business expenditure by the assessee. He made certain additions which included the interest paid on loans used for investment in tax-free bonds. The interest so disallowed and added to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment Co. Ltd. were purchased on 18.8.1989 and 29.3.1990 and 12.3.1990 i.e., much subsequent to the repayment of the aforesaid finance. 10. As per chart extracted in paragraph 5 of the assessment order the bonds of M/s. Peerless General Finance Investment Co. Ltd. were sold on 17.7.1989, 26.7.1989, 7.8.1989, 4.9.1989, 6.3.1990 and 30.3.1990. Thus, except the sales made on 17.7.1989 and 26.7.1989 the bonds of M/s. Peerless General Finance Investment Co. Ltd. were sold by the assessee much after the repayment of the aforesaid finance of Rs.7.25 crores. 11. Thus, it can be safely concluded on the basis of facts and figures noted in the assessment order that the investment in bonds and units were part of business activity of assessee and the entire capital/fund available to the assessee either as its own fund or as borrowed capital was a common pool, out of which purchases/investments were made from time to time and were also sold. Therefore, the inference drawn by the fact finding authorities that the entire investment in tax free bonds were from the borrowed finance, is apparently incorrect and perverse. 12. In view of the facts aforenoted, the findings recorded by the ITAT in para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... introduction of s. 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non- taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the legislature has not only inserted s. 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the IT Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum Explaining the Provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investeecompany, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Ltd. as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat event, the question is as to on what basis those cases are to be decided where the shares of other companies are purchased by the assessees as 'stock-in-trade' and not as investment'. We proceed to discuss this aspect hereinafter. 39. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as 'income' under the head 'Profits and gains of business or profession' . What happens is that, in the process, when the shares are held as 'stock-intrade', certain dividend is also earned, though incidentally, which is also an income. However, by virtue of s. 10(34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of s. 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share Stock Brokers (P) Ltd. case (supra). Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g regard to the kind of the assessee, suo motu disallowance under s.14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO. 14. In South Indian Bank Limited Vs. Commissioner of Income Tax, (2021) 10 SCC 153 (paragraphs 31 and 32) Hon ble Supreme Court again explained the provisions of Section 14A of the Act 1961, in the matter and held as under : 31. The aforesaid discussion and the cited judgements advise this Court to conclude that the proportionate disallowance of interest is not warranted, under Section 14-A of the Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to assessee Banks in those situations where, interest-free own funds available with the assessee, exceeded their investments. With this conclusion , we unhesitatingly agree with the view taken by the leaned ITAT favouri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based on theory of apportionment of expenditure between taxable and non taxable income. 18. In the present set of facts, the assessing officer although noted certain facts and figures in paragraph 5 and certain other paragraphs of the assessment order which discloses that the assessee was also engaged in the business of purchase and sale of bonds and units and it was only for a period of about 2.1/2 months that he borrowed a sum of Rs.7.25 crores whereas the purchases of tax free bonds were made even prior to taking finance and subsequent to the repayment of finance. Therefore, when the Tribunal or the authorities below were of the view that interest on finance taken by the assessee was invested in the tax free bonds which earned some tax free income, then they must have applied their mind on the questions of apportionment, particularly in view of the law laid down by Hon ble Supreme Court in the case of Maxopp. Investment Ltd. (supra) and South Indian Bank Limited (Supra) afore-quoted. 19. We are of the view that since the impugned order of the ITAT suffers from perversity and examination of facts needs to be made by the fact finding authority i.e., the Assessing Officer with rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as acted in ignorance of a law laid down by the Hon ble Supreme Court or when the decision is given in an ignorance of the terms of a statute or rule having statutory force. Thus, the rule of per incuriam can be applied where a court omits to consider a binding precedent of the same court or the superior court rendered on the same issue or where a court omits to consider any statute while deciding that issue, vide Dr. Shah Faesal Ors. Vs. Union of India Anr. (2020) 4 SCC 1 (paragraph 31) and the State of Bihar Vs. Kalika Kuer alias Kalika Singh and Ors. (2003) 5 SCC 448 (paragraph 5 to 9). Since in the present set of facts the co-ordinate Bench of this Court in the case of National and Grindlays Bank Limited (supra) and Kanoria Investment Pvt. Ltd. (supra) have taken the aforesaid view without noticing the Constitutional Bench of the Hon ble Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. (supra). Therefore, we hold that the aforesaid two judgments of co-ordinate Bench of this Court are per incuriam. 22. In view of the law laid down by the Constitution Bench of Hon ble Supreme Court in Distributors (Baroda) Pvt. Ltd.(Supra), we do not find any illegality in the impugne ..... X X X X Extracts X X X X X X X X Extracts X X X X
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