ACIT, CIRCLE- 4(1), NEW DELHI vs. BAJAJ RESOURCE LTD., JAIPUR

PER N.K. BILLAIYA, ACCOUNTANT MEMBER,

2. The grievances of the Revenue read as under:

“Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) has erred in deleting the addition made on account of disallowance u/s 14A in accordance with Rule 8D of the I.T. Rules amounting to Rs. 6,85,74,900/-.

2. Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) has erred in accepting the assessee’s submission that no exempt income has been earned.”

“The main plank of the argument of the assessee in this regard is that none of the investments was made out of interest-bearing borrowed funds but from the capital, reserves/surplus and interest free borrowings and therefore, provisions of Sec.l4A do not apply to the exempt income claimed by the assessee in the return of income. In support of its claim, the assessee has also submitted year-wise investments and the flow of the funds right from F.Y.2007-08 along with the financials for the respective years. For instance, during the F.Y.2009-10, the assessee has made investment in golden shore investing Ltd., and the source of the investment was claimed to be available capital and reserves /surplus. It was also claimed that the amount of Rs.50.8 Crores borrowed from PNB during that year was specifically utilized for the purpose of distribution of dividend and not for making investment in Golden Shore Investing Ltd, This contention of the assessee is not well founded. On perusal of the ledger account of the loan and the dividend account, the dividend payout was on 02- 01-2010 whereas the loan amount was transferred from PNB loan account on 13-01-2010. Similarly, during the F.Y.2012-13, the assessee has made sizeable investments and also borrowed funds in that year. The claim of the assessee in this year is also that the borrowed funds were utilized for making advances to the associate concern for which interest income has been earned. In this year also, the investments advances were made out of common pool of funds and therefore, it is not correct to say investments yielding exempt income were made only out of interest free funds.”

“In view of the above, various contentions raised by the assessee are not legally ten..' and proportionate interest expenditure in relation to exempt income is worked out as per the formula provided in clause (ii) of rule 8D as under: a) The expenditure in relation to income which does not form part of the total income as per Rule 8D(2)(ii) shall be the aggregate of following amounts, namely-

A*B/C where; (i) ‘A’ amount of expenditure by way of interest: Rs. 7,97,31.000 (ii) ‘B’ the average value of investment (excluding investment in foreign companies), income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year : Rs. 44234.455 lakhs iii) ‘C’ the average of total assets as appearing in the balance sheet of the assessee on the first day and the last day of the previous year : Rs. 58171.195 lakhs Disallowance u/s 14A r.w.r. 8D (ii) : A*B/C = Rs. 6,06,28.900

12. Assessment was strongly agitated before the ld. CIT(A). The contention made before the Assessing Officer were reiterated

“5.5 The submissions of the appellant have been carefully considered. There is a strength in the argument of the appellant. The appellant has made investment in its own subsidiary companies. As submitted by the appellant, the investment is for expansion of the corporate group and comes under business expediency. Hence it is clear that the investments has been made not to earn interest free income but for expansion of the business. In regard to the foreign investment, i.e., M/s. Golden Shore Investing Limited, the dividend income is taxable. Hence this is not come under purview of Section 14A. The loan taken by the appellant has been invested in the M/s. Golden Shore Investing Limited which is evident from the bank account of the appellant company. Investment has been made on the same day.

Coming to the issue of applicability of Section 14A, in this case does not arise as investment is for business expansion. There has not been any direct linkages between the loan taken and investments, exception in case of M/s. Golden Shore Investing Limited. Since this income from M/s. Golden Shore Investing Limited is taxable, hence loan taken for investment in the referred company cannot be generalised as 'Expenditure' for calculation of Section 14A.

The submissions of the appellant is comprehensive regarding why Section 14A should not be applicable. There is no doubt that investment has been made to enhance the business of the group company and lesser intention of getting interest free income. The Hon'ble High Court of Delhi in the case of Pr.CIT Vs. IL & FS Energy Development company Ltd., 250 Taxmann 174, held that no disallowance U/S.14A to be made in the AY under question, because no exempt income is earned. In view of this, the submissions of the appellant is accepted and the addition made by the Assessing Officer is deleted.”

DETAILS OF LONG TERM INVESTMENTS MADE IN SISTER CONCERNS

For the year ended (Rs. in lacs) 31-03-2010 | 31-03-2011 31-03-2012 ! 31-03-2013 31-03-2014 Particulars Non. Current Investment Investment in Equity i Instruments ------- - - 0.01 Baiai Capital Venture Pvt Ltd 0.01 0.01 Bajaj Corp Ltd 500.00 500.00 500.00 382.00 382.00 - - Baiai Hindustan Ltd 29,500.00 29,500.00 29,500.00 Bajaj International Realty Pvt 5,012.50 5,012.5 5,012.5 Ltd Global World Power Project Pvt 500.00 500.00 500.00 500.00 Ltd — - 750.2 Bajaj Infrastructure Development Company Ltd - - - Bajaj Power Ventures Pvt Ltd 499.88 8499.83 - - - 8419.94 V Opul Construction Pvt LTd 2.00 - - - - Kartikeya Properties Pvt Ltd 2.00 - - - - Kashyap Properties Pvt Ltd 5,500 Advance towards share application money -Bajaj Power Ventures Ltd. 4.96 - - - SKB Roop Commercial LLP 4.96 Total (A) 504 6,500 36,012.39 52,319.24 36,149.67 Investment in Foreign subsidiaries Global Power Projects - - 505.34 505.34 505.34 Singapore Pvt Ltd 2,741.24 Golden Shore Investing Ltd 2,322.51 2,322.51 2,322.51 2,322.51 2,827.85 2,827.85 3,246.58 Total (B) 2,322.51 2,322.51 Total (A+B) 2,826.51 8,822.51 38,840,24 55,147.09 39,390.25

DETAILS OF NON INTEREST BEARING FUNDS

For the year ended (Rs. in laes) Particulars 31-03- 31-03- 31-03- 31-03-2013 31-03-2014 2010 2011 2012 Net owned funds Equity Share 99.31 99.31 99.31 99.31 99.31 capital Preference Share 0.02 0.02 0.02 0.02 0.02 Capital 99.33 99.33 99.33 99.33 99.33 Reserve and surplus Securities 1,574.37 1,574.37 1,574.37 1,574.37 1,574.37 premium reserves General Reserves 1,187.80 1,193.63 1,213.63 1,213.63 3,826.58

Surplus in statement of P&L 8,344.81 8,559.59 16,667.41 25,135.94 42,445.28 - Industrial Subsidy 20.00 20.00 - Total(i ) 11,126.98 11,347.59 19,455.41 27,923.94 47,846.23

Other non interest bearing funds Zero percent 29,500 29,500 optionally convertible Debentures ( Directly invested into equity shares of Baiai Hindustan - - - Total (ii) 29,500 29,500

Total (i + ii) 11,226.31 11,446.92 49,054.74 57,523.27 47,945.56

Investee Company F.Y. of Source & Remarks (Balance Sheet and Investment relevant schedules are enclosed as Annexure-2 Balance Sheet as on 31.03.2008 shows: M/s. Bajaj Corp Ltd 2007-08 1. The assessee has Capital & Reserves /Surplus of Rs. 7228.85 lacs. 2. No borrowings are there in the Balance Sheet. The amount of Rs.22.78 lacs in unsecured loans represent sales tax deferment which cannot have any relevance with the investment made.

Thus the amount of Rs.500 lacs was invested out from capital and internal accrual. 2009-10 M/s. Golden Shore Balance Sheet as on 31.03.2010 shows: Investing Ltd (Foreign 1. The investment of Rs.2322.51 lacs has been Company) made out of the opening & closing Capital & Reserves/surplus of Rs. 7866.09 lacs & RS.11226.30 lacs respectively.

2. The company borrowed Rs.50.38 crores from PNB during the year. However, the said loan was specifically utilised for the purpose of distribution of dividend as shown in the papers enclosed.

3. Further, in subsequent years, the loan was repaid but the investment subsisted.

4. It is also worth pointing out here that investment in Golden Shore Ltd is a foreign investment and since the income therefrom is taxable, the question of application of provisions of section 14A does not apply. 2010-11 M/s. Global World Power Balance Sheet as on 31.03.2011 shows: Projects Pvt Ltd 1. The Capital & Reserves and surplus at the opening & closing of the year consisted of Rs.11226.31 lacs & Rs.11446.92 lacs respectively and investment of Rs.500 lacs has been made by utilising owned funds.

2. The assessee had opening unsecured loan from Punjab National Bank of Rs.50.38 crores which was specifically utilised for the purpose of payment of dividend. Evidences are enclosed to explain the same. Moreover, the loan has been repaid during the year of 2010-11 while the investments were made during the year and was existing at year end. This also shows that borrowings were not utilised for the purpose of making investments.

3. No borrowings are there in the Balance Sheet as on 31.03.2011 and the amount of Rs.24.34 lacs in unsecured loans represent sales tax deferment. This cannot be considered to have been investment in the equities of sister concerns. Thus, investments of Rs.500 lacs were made out of capital & internal accruals.

M/s. Bajaj Hindustan Ltd Balance Sheet as on 31.03.2012 shows:

2. The borrowed funds of Rs.10499.32 lacs were utilised for the purpose of making advances to the associate concern from which interest income of Rs.399.21lacs has been earned as per the details enclosed. Further, more taxable income of Rs.80.40 lacs is earned from sale of current investments made by using these funds. A detailed submission and statement showing flow of funds in this regard was submitted during the course of assessment proceedings of A.Y. 2013-14 vide letter date 14.03.2016. The submissions of the assessee were accepted and in the assessment proceedings and no disallowance u/s 14A chart is enclosed herewith for ready reference. Thus, all these investments were made out of interest free funds of the assessee 2013-14 M/s. Bajaj Infrastructure Balance Sheet as on 31.03.2014 shows: Development Company Ltd 2013-14 M/s. Golden Shore Investing Ltd. (Foreign 1. The company has opening & closing capital, Company) reserves ad surplus & interest free borrowing of Rs.57523.47 lacs & Rs.47945.56 lacs respectively which are sufficient to make investments (accumulated) of Rs.55147.09 lacs & Rs.39396.25 lacs respectively. 2. ,4s stated above, all the interest bearing funds were borrowed for the purpose of advancing to sister concerns from which the assessee has earned interest income as detailed in the statement enclosed. Further, the company has also earned other taxable income by temporarily investing out of such borrowed funds. The assessee has repaid all interest bearing funds during the year under consideration but this investment was made during the year and is persisting as on 31.03.2014 clearly showing that it was made out of on interest bearing funds of the assessee.

3. It is also worth pointing out here that investment in Golden Shore Ltd is a foreign investment and since the income therefrom is taxable, the question of application of provisions of section 14A does not apply. Thus, all these investments were made out of interest free funds of the assessee.

Vs CIT in Civil Appeal No. 9606 of 2011 at Para 15 of its order has observed as under:

“15. The appellants argue that the investments made in bonds and shares should be considered to have been made out of interest free funds which were substantially more than the Page 8 of 22 investment made and therefore the interest paid by the assessee on its deposits and other borrowings, should not be considered to be expenditure incurred in relation to tax free income on bonds and shares and as a corollary, there should be no disallowance under Section 14A of the Act. On the other hand, the counsel for the revenue refers to the reasoning of the CIT(A) and of the High Court to project their case.”

“20. Applying the same logic, the disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest free funds, under Section 14A of the Act. In other words, if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax- free securities then in such cases, disallowance under Section 14A cannot be made.”

observed as under:

“28. The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel (Supra) to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance.”

against the revenue and in favour of the assessee.

dividend income were made in earlier A.Ys and we have the benefit of assessment order dated 14.03.2016 framed u/s 143(3) of the Act for A.Y 2013–14. We find that no disallowances were made by the Assessing Officer in his scrutiny assessment case.

who, invoking the provisions of Section 263 of the Act, framed an order dated 30.03.2018. The said order was quashed by this Tribunal vide order dated 29.0 8.2018 in ITA No. 2838/DEL/2018.

down by the Hon'ble Supreme Court in the case of South Indian Bank

Ltd [supra], in our considered opinion, there cannot be any disallowance of interest for earning exempt income and there is no reason to interfere with the findings of the ld. CIT(A).

expenses is concerned, we find that there is no dispute that all the investments are made in the sister concern in which the assessee has deep business interests and under business expediency, it has invested various amounts in shares of group companies. In our considered opinion, these investments are strategic investments made for furtherance of business of its sister concern.

Corp Ltd and Bajaj Hindustan, all other investments are unquoted investments and any appreciation in the value of shares at the time of sale would be taxable.

any remuneration from the company and take care of entire investment work. No error or infirmity has been pointed out by the Assessing Officer who has simply computed the disallowances as per formula given in Rule 8D. In our considered view, such mechanical approach of the Assessing Officer has no legs to stand on. We, therefore, decline to interfere with the findings of the ld. CITA.

4018/DEL/2018 is dismissed.