COMMISSIONER OF INCOME TAX-I JALANDHAR vs. M/S MAX INDIA LIMITED

ITA No.185 of 201 (O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.185 of 2013 Date of decision: 1.10.2015 Commissioner of Income Tax, Jalandhar I, Jalandhar ……Appellant M/s Max India Limited …..Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE RAMENDRA JAIN

ITA No.185 of 201 (O&M) 2 expenses are attributable to such investment?”

ITA No.185 of 201 (O&M) 3 dated 19.1.2006, Annexure A.2, the CIT(A) partly allowed the appeal and restricted the addition/disallowance made by the Assessing Officer under Section 14A of the Act to ` 10 lacs only and deleted the addition of ` 1.40 2015.11.17 12:40 integrity of this document High Court Chandigarh

ITA No.185 of 201 (O&M) 4 Income Tax Rules, 1962 (in short, “the Rules”) was notified by the Central under the Act?

ITA No.185 of 201 (O&M) 5 excluded correctly by the assessee from its total income. However, the assessee has failed to allocate any expenditure as being related to this income and has not offered anything as disallowable expenditure under the provisions of section 14A. It is to be mentioned that under this section, no deduction is allowable in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under the Act. In this scenario where the company had invested huge amounts in such investments and had claimed a loss of ` 14.82 crores on account of its corporate office, the assessee was called upon to allocate its expenses towards its investment activities and monitoring of these investments. Besides these expenses, large part of expenditure and energies of the treasury division of the company are also devoted towards these investments. The assessee replied to it vide letter dated 29.3.2004 and its submissions regarding this can be summarized as under- i) The direct expenses of one particular investment, related to atleast, in the form of foreign travelling has not been claimed by the assessee as revenue expenditure. The assessee was not able to divide its expenses into those relatable to its running of businesses and those relatable to protecting and planning its investments. ii)The total expense on salaries of directors and travelling is only around ` 80 lacs. The directors are not devoting much time to the investment activities. iii)The assessee claimed that only the expenses incurred for earning the income i.e. specific to the securities on which dividend has been received, is disallowable. iv)The assessee's contentions have been gone through and are GURBAX SINGH 2015.11.17 12:40 integrity of this document High Court Chandigarh

ITA No.185 of 201 (O&M) 6 rejected in view of the following- a) Section 14A talks about expenditure incurred by assessee in relation to income which has much larger scope than the limited scope of expenditure incurred for earning an income. Therefore, all expenses in relation to the earning of dividend income would have to be allocated and disallowed. b) Expenditure incurred in relation to investments which were there for earning dividend income but during the year did not yield any dividend, is also not allowable. For example, a person engaged in agriculture activities cannot claim the expenses from other income even if the entire crop fails. c) As discussed above, there are corporate expenses of ` 14.82 crore. A large part of it has definitely gone towards holding and monitoring the investments which have yielded/were meant for earning dividend. The investments made in securities meant for earning dividend are more than 55% of total capital and funds i.e. ` 361.64 crores out of ` 654 crores. The investments are even simple securities of 2015.11.17 12:40 integrity of this document High Court Chandigarh

ITA No.185 of 201 (O&M) 7 Looking to the extent of investments of the assessee and the expenses in the corporate office, an amount of ` 1.50 crore is apportioned as being in relation to such exempt income and is disallowed under Section 14A of the IT Act, 1961.”

ITA No.185 of 201 (O&M) 8 expenditure incurred on investment activities. Further, since the appellant has been running a number of operating divisions like pharmaceutical, BOPP, Maxfoil, Metaliser and Healthcare, considerable time of the corporate office employees could be expected to be spent on these activities rather than investment activities. Taking the totality of the circumstances into consideration, I hold that the disallowance of ` 1.50 crore made by the Assessing Officer is excessive looking at the diversified nature of the activities carried on by the appellant. I

accordingly consider it just and fair to restrict the disallowance under Section 14A to ` 10 lacs. Therefore while an addition of ` 1.4 crores is deleted, the disallowance of ` 10 lacs is confirmed.”

ITA No.185 of 201 (O&M) 9 not made investment in shares, out of borrowed funds in as much as the MCL did not had any interest bearing borrowed funds, nor any interest expenditure was debited in the profit and loss account of that company, prior to merger with the assessee (PB-97 and 102 of supplementary PB). Therefore, the investments to the extent of ` 195.48 crores, held by the assessee as on 1.4.2000 had no nexus with the borrowed funds. A.2 Balance investments ` 6765 crores. A.2.1 Investments, not resulting in earning of exempt income – ` 36.01 crores. As regards the balance investments, amounting to ` 67.65 crores (` 263.13 crore – ` 195.48 crores) held as on 1.4.2000 the same included investment in shares of foreign subsidiary company and other Government securities/Bonds/mutual funds, the income wherefrom was not exempt from tax under the provisions of the Act, aggregated to ` 36.01 crores. The break up of the aforesaid investments is as under (PB87-88 of supplementary PB): Nature of investment Amount in Rs. And crores Foreign subsidiaries Max Asia Pac Limited

ITA No.185 of 201 (O&M) 10 borrowed funds, if any attributable to the aforesaid investments, income wherefrom is not exempt under the provisions of the Act is ousted from the application of the provisions of section 14A of the Act. A.2.2 Remaining investments, out of interest free funds ` 31.64 crores. The break up of balance investments, aggregating to ` 31.64 crores is as under PB 87-88: Nature of investment Amount in ` ` ` ` in crores Max Telecom Ventures Limited 30 (MTVL) Alliance Capital Mutual fund and others

ITA No.185 of 201 (O&M) 11 secured redeemable non convertible debentures (NCD). It would be pertinent to point out that the aforesaid NCD of ` 40.33 crores (carrying interest) and Zero Coupon FCD (interest free) of ` 22.65 crores were issued through a same letter of offer, which was placed on record before learned CIT(A) vide submission dated September 18, 2009 (PB 251). The object of aforesaid proceeds, as per the letter of offer, was to meet out the capital expenditure of the existing divisions, working capital requirements, repayment of term loans and investment in joint ventures. However Note 3 of the offer document (PB-251) stipulated that proceeds of NCD (interest bearing) were not utilized for investment in shares of group companies of joint ventures. The aforesaid object was to be met out of the proceeds of zero coupon FCDs. The relevant portion of the aforesaid note reads as under:- “As per the SEBI guidelines for disclosure and investor protection – clarification II, the proceeds of NCD issue cannot be utilized for acquisition of shares and/or providing loan to any company belonging to the same group. “In line, with above, company's requirements for investments into joint ventures in Phase I, is proposed to be met through the proceeds of FCD issue and/or preferential issue of warrants to the management group.” In view of the above, no portion of the interest bearing NCD was utilized towards investment in shares of MTVL, a group company of the assessee. Further, as is evident from the case flow statement of the year ending 31.3.1996, against the aforesaid aggregate interest bearing borrowing of ` 40.33 crores (from NCD), the assessee had acquired fixed assets from an amount of ` GURBAX SINGH 2015.11.17 12:40 integrity of this document High Court Chandigarh

ITA No.185 of 201 (O&M) 12 35.20 crores and repaid existing loans of ` 6.38 crores. In that view of the matter, the investment in shares of MTVL was made of interest free funds and no portion of the interest bearing borrowed funds were utilized for making that investment, which were utilized for other business purposes of the assessee and therefore, no portion of interest expenditure in any year including the assessment year 2000- 01 and onwards, had no nexus with said investment, warranting disallowance under section 14A of the Act.” xx xx xx x xx xx xx xx x xx x x

ITA No.185 of 201 (O&M) 13 surplus funds available with the assessee on an overall basis during the financial year are sufficient to make investment, presumption needs to be drawn that surplus funds and not interest bearing funds could be said to have been used for making investments by the assessee in the financial instruments yielding exempt income. Hence, no part of interest expenditure can be considered for the purpose of computing disallowance under Section 14A of the Act. Further, in the absence of any proximate nexus having been established by the lower authorities between the administrative and other expenses and the exempt income, in our view, no disallowance under section 14A of the Act could have been made for the assessment year under consideration.”

ITA No.185 of 201 (O&M) 14 pharmaceutical, BOPP, Maxfoil, Metaliser and Healthcare, considerable time of the corporate office employees could be expected to be spent on these activities rather than investment activities. Keeping in view the nature of activities carried on by the assessee, the CIT(A) restricted the disallowance to ` 10 lacs only. The Tribunal after considering the matter held that no part of interest expenditure could be considered for the purpose of computing disallowance under Section 14A of the Act. Further, in the absence of any proximate nexus having been established by the lower authorities between the administrative and other expenses and the exempt income, no disallowance under section 14A of the Act could have been made for the assessment year under consideration. Learned counsel for the appellant-revenue has not been able to show any illegality or perversity in the approach of the Tribunal or that the findings recorded by it are erroneous.

ITA No.185 of 201 (O&M) 15 revenue that directly or indirectly some expenditure is always incurred which must be disallowed under Section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of Section 14A, cannot be accepted. Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand....”

ITA No.185 of 201 (O&M) 16 1.4.2002, losses pertaining to exempted income could not be disallowed. Such is not the position in the present case.

(Ajay Kumar Mittal) Judge October 1, 2015 (Ramendra Jain) 'gs' Judge GURBAX SINGH 2015.11.17 12:40 integrity of this document High Court Chandigarh