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TMI Blog2004 (3) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment. Thus, we are of the view that assessee is entitled to the allowance of the loss of Rs. 8,44,156 for the asst. yr. 1989-90 and Rs. 5,75,994 for the asst. yr. 1991-92. Accordingly, the first ground in the appeal filed by the Department for the asst. yr. 1989-90 is dismissed and the first ground filed by the assessee in the appeal for the asst. yr. 1991-92 is allowed. We have carefully considered the issue. Sec. 14A which has been introduced by the Finance Act, 2001, w.e.f. 1st April, 1962, says that for the purpose of computing the total income under Chapter IV, 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 the Act. There is no dispute that the income from bonds was not chargeable to income-tax and was exempt under s. 10. The expenditure incurred in relation to such income is, therefore, to be disallowed. This is what the AO has done. He has attributed a part of the financial and administrative expenses as expenditure incurred in relation to the tax-free income and has disallowed the same. In our view, this action of the AO is authorised by the section. Before us, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e important factor to be noticed was the interest accrued on them and the price of the bonds depended on the interest accrued thereon. He, therefore, held that the purchase and sale transactions in the bonds and the assessee's right to receive the interest thereon are not mutually exclusive, but were merged into each other. He, therefore, held that the interest in respect of which exemption was claimed under s. 10 can only be the net interest. Accordingly, he held that there was only a negative earning from the tax-free bonds (Rs. 6,96,460 - Rs. 8,44,156) and hence, the assessee will not be eligible for any exemption under s. 10. In this view of the matter, the loss on sale of tax-free bonds was added back in the assessment. On appeal, the assessee contended that the business loss of Rs. 8,44,156 cannot be ignored. It was pointed out, relying on the judgment of the Supreme Court in Vijaya Bank Ltd. vs. Addl. CIT (1991) 94 CTR (SC) 216 : (1991) 187 ITR 541 (SC), that the entire consideration paid for the purchase of bonds, including the interest accrued thereon upto the date of purchase, shall be considered as capital outlay and no part thereon can be set off against the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry vs. CIT (1996) 131 CTR (Guj) 127 : (1996) 222 ITR 831 (Guj), where it was held that a citizen is free to carry on his business in any manner provided the same is within the four corners of the law. It was also submitted that the ruling in McDowell has been considerably watered down in the later judgment of the Supreme Court. As regards the judgment of the Bombay High Court in American Express International, it was contended that the judgment was distinguishable on facts. It was pointed out that, in that judgment the assessee was consistently adjusting the broken period interest, both received and paid, against each other and the Department had also accepted the adjustment as correct for a long period of time. In the present case, the controversy is whether the loss in the sale of bonds could be disallowed. Further, it was submitted that the interest in the present case is tax-free which was not the case in the cited judgment. It was thus pointed out that this decision is inapplicable to the facts of the present case. 6. In the asst. yr. 1991-92, the AO on the same lines has disallowed the business loss of Rs. 5,75,994 on the sale of 10 per cent tax-free bonds of MTNL. The disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he genuineness of the sale or the price received by the assessee is not in question, we do not see how the loss can be disallowed. There is no evidence brought on record in the assessment order for both the assessment years to the effect that either the sale or the sales price is not genuine. The fact that the interest received is free of income-tax is a position recognised by the IT Act itself. The assessee has merely made use of the provisions of the law. Use of the provisions of the law cannot be considered to be abuse of law. Even if it is assumed that this is a premeditated transaction, there is nothing to impeach the genuineness of the transaction. Mere tax planning, without any motive to evade taxes through dubious or colourable devices, is not frowned upon even by the McDowell principle. 8. As regards the judgment in American Express International, as rightly pointed out on behalf of the assessee, that was a case where the interest received was assessable to tax and the question was whether the interest received and paid, both for the broken period, could be adjusted on the basis of the matching principle. Distinguishing Vijaya Bank's case, it was held that since both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, the assessee furnished details to show that the purchases of public sector bonds were directly financed by M/s Bimal S. Gandhi, M/s Hiten P. Dalal and M/s Industrial Credit Development Syndicate Ltd. The CIT(A) held that the money invested in the tax-free bonds came out of direct financing from certain parties. He also held on the basis of the judgment of the Supreme Court in the case of CIT vs. Indian Bank (1965) 56 ITR 77 (SC), that even if the amount is borrowed and interest is paid thereon on the purchase of tax-free securities, the interest would be an allowable deduction. In this view of the matter, he disapproved of the action of the AO in apportioning a part of the financial and administrative expenses for the earning of the tax-free interest. The Revenue is in appeal to contend that s. 14A is attracted to the present case. It was pointed out that the CIT(A) was not justified in accepting the assessee's unsubstantiated submission that the purchase of tax-free bonds was directly financed by certain other parties. In this connection, it is submitted that there was no movement of cash, but only book entries were made to regularise these transactions. On the other hand, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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