PR. COMMISSIONER OF INCOME-TAX, -2 vs. M/S. BOMBAY DYEING AND MFG CO LTD

1 ia1225.15 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1225 OF 2015 Principal Commissioner of Income Tax-2, Mumbai. .. Appellant. Vs. M/s. Bombay Dyeing & Mfg. Co. Ltd. .. Respondent. Mr. Suresh Kumar for the Appellant. Mr. Madhur Agarwal a/w. Mr. A. K. Jasani for the Respondent. CORAM : A.S. OKA & A.K. MENON, JJ. DATED : 28TH NOVEMBER, 2017 JUDGMENT (PER A.K. MENON. J.)

(2) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in deleting the disallowance under Section 80M of the Income Tax Act relying on the decision of the Bombay High Court in the case of Reliance Utilities and Power Ltd and HDFC Bank Ltd. without appreciating the fact that in the case relied upon, hcs CNR No : HCBM020143852015 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:52:15

2 ia1225.15 the Assessing Officer had not proved the required nexus between the investments made during the year and the borrowed funds and as such the facts in that case are different from the facts of the present case ?” 2. The appellant is the Principal Commissioner of Income Tax. The respondent – assessee is a company incorporated under the Companies Act engaged in the business of manufacture and sale of textile. The facts in brief are as under : The assessee filed its return for the Assessment Year 1995-96 showing income of Rs.34,80,16,010/-. In the course of assessment, the Assessing Officer observed that the assessee claimed deduction under Section 80M of the Act in the sum of Rs.8,68,32,079/-. The amount represented the deductible component of dividend declared and paid by the company in the sum of Rs.17,97,83,298/-. The Assessing Officer queried the respondent as to why the dividend income should not be taken as net income and then deduction be allowed in view of the provisions of Section 80AA. 3. For ease of reference it would be useful to reproduce provisions of Section 80M which has been since omitted with effect from the Finance Act 1st April, 2014 : “80M. Deduction in respect of certain inter- corporate dividends -- (1) Where the gross total income of a domestic Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:52:15

3 ia1225.15 company, in any previous year, includes any income by way of dividends from another domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends from another domestic company as does not exceed the amount of dividend distributed by the first mentioned domestic company on or before the due date: (2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year. Explanation.- For the purposes of this section, the expressions "due date" means the date for furnishing the return of income under sub-section (1) of section 139.” Section 80AA which has been since omitted with effect from the Finance Act 1st April, 1998. Section 80AA read thus : “Where any deduction is required to be allowed under section 80M in respect of any income by way of dividends from a domestic company which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with provisions of this Act. [before making any deduction under this Chapter] and not with reference to the gross amount of such dividends” 4. The assessee contended that they had several bank accounts some of which had overdraft facilities and in these Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:52:15

4 ia1225.15 accounts business proceeds are regularly deposited, as a result the balances in these accounts fluctuate and are sometimes in the negative (due to overdrawing) depending on withdrawals. It was contended that no segregation could be made for calculation of net dividend as per Section 80AA. 5. The Assessing Officer did not accept this contention. He observed that the assessee had borrowed from IDBI on 24th September, 1994 which money was used to buy UTI units. Severals of the entries indicated co-relation with money borrowed and investment made. The assessee contended that no dividend has been paid on the units purchased and the dividend on these units were received in next financial year and thus, interest of these investments should not be included with the dividend income of the current year. In conclusion, the Assessing Officer found that the expenditure of earning dividend at Rs.22,46,51,000/- was much more than that of the dividend received of Rs20,71,91,688/- and hence provisions of Section 80AA will not enable the assessee to claim deduction under Section 80M. 6. Penalty proceedings were also initiated under Section 271(1)(c). The Commissioner of Income Tax (Appeals) [CIT (A)] after considering the respondents' contention observed that the Assessing Officer has worked out cash flow on the basis of figures mentioned in the assessment order but these figures could not be Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:52:15

5 ia1225.15 reconciled with the figures on the balance sheet of the company and hence the figures were not verifiable. The Assessing Officer was therefore directed to verify the interest payable/paid as above and allocate. Both, the revenue and assessee were in appeal before the Tribunal which came to be disposed of vide common order dated 8th October, 2014. The Tribunal after hearing the parties observed that in the case at hand, the assessee had paid to IDBI Bank in pursuance of the loan agreement dated 22nd September, 1994 and it was held that if the assessee's capital, profit-reserve, surplus and current account deposits were higher than the investment in the tax free securities it has to be presumed that investment was made by the assessee would be out of the interest free funds available with the assessee. 7. In the instant case, the assessee is paid interest in pursuance of the agreement which fact has not been properly considered by the Assessing Officer or the first Appellate Authority. The Tribunal observed that there was no basis in presuming that the assessee had made investment in the UTI units from borrowed funds. As far as the issue pertaining to deduction under section 80M was concerned, the Tribunal followed decision of the Co-ordinate Bench of the Chandigarh in the case of Punjab State Industrial Goods and Industrial Development Corporation Ltd. and decided the ground in favour of the assessee. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:52:15

6 ia1225.15 8. Being aggrieved, the revenue is in appeal before us. Mr.Agarwal, learned counsel for the Respondent submitted that the issue was clearly covered in view of the decision of this Court in the Commissioner of Income Tax vs. Reliance Utilities and Powers Ltd. (2009) 313 ITR 340 (Bom.). We have perused the said judgment. The Division Bench held that when the funds available were both interest-free and overdraft and/or loan taken, then a presumption would arise that the investments made would be out of interest-free funds generated or available with the company, provided the interest-free funds were sufficient to meet the investments. In the case at hand, Mr.Suresh Kumar fairly conceded that the said decision holds the field as on date. In view of the above and considering the issue at hand, we are of the view that the respondent assessee is held entitled to benefit of the aforesaid presumption and accordingly, the questions proposed do not give rise to any substantial question of law. The impugned order does not call for interference and accordingly the appeal need not be entertained. As a consequence the following order is passed : (i) The appeal is dismissed. (ii) There will be no orders as to the costs. (A.K. MENON, J.) (A.S. OKA, J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:52:15 Powered by TCPDF (www.tcpdf.org)