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Income Tax Appellate Tribunal, DELHI BENCH ‘G’, NEW DELHI
Before: Sh. Kuldip SinghDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by the assessee against the orders of ld. CIT (A)-33, New Delhi dated 19.01.2017 and the orders of ld. CIT (A)-9, New Delhi dated 20.02.2017.
2. In following grounds have been raised by the assessee: “1. The ld. CIT (Appeals) of Income Tax erred in disallowing the interest payment of Rs.3,05,12,745/- keeping in view the interest free advances given by the appellant company. Full arguments will be advanced at the time of hearing.
2. The ld. CIT (Appeals) of Income Tax erred in ignoring the fact that the appellant had advanced the loans and advances from its own funds and not out of the borrowed funds.” 2 Deepak Dhar Gupta
3. In , following grounds have been raised by the assessee: “1. The ld. CIT (Appeals) of Income Tax erred in disallowing the interest payment of Rs.69,73,346/- keeping in view the interest free advances given by the appellant company. Full arguments will be advanced at the time of hearing.
2. The ld. CIT (Appeals) of Income Tax erred in ignoring the fact that the appellant had advanced the loans and advances from its own funds and not out of the borrowed funds.”
In following grounds have been raised by the assessee:
1. The ld. CIT (Appeals) of Income Tax erred in disallowing the interest payment of Rs.68,81,215/- keeping in view the interest free advances given by the appellant company. Full arguments will be advanced at the time of hearing.
2. The ld. CIT (Appeals) of Income Tax erred in ignoring the fact that the appellant had advanced the loans and advances from its own funds and not out of the borrowed funds.”
In following grounds have been raised by the assessee:
1. The ld. CIT (Appeals) of Income Tax erred in disallowing the interest payment of Rs.16,31,794/- keeping in view the interest free advances given by the appellant company. Full arguments will be advanced at the time of hearing.
The ld. CIT (Appeals) of Income Tax erred in ignoring the fact that the appellant had advanced the loans and advances from its own funds and not out of the borrowed funds.
The ld. CIT (Appeals) of Income Tax erred in not accepting the disallowance amounting to Rs.4,10,947/- u/s 14A made by the appellant and allowed the enhancement of disallowance by Rs.40,79,583/- made by the Assessing Officer. The increase in disallowance u/s 14A is not at all justified and requires revision. Full arguments and detailed submissions will be made at the time of hearing.”
3 Deepak Dhar Gupta 6. The issues involved in these appeals to be adjudicated are, i. Disallowance of interest payment on the interest free advances given by the assessee. ii. Disallowance u/s 14A of the Income Tax Act, 1961 more than the disallowance made by the assessee suo moto.
The assessment year 2012-13 is taken as the lead case for the sake of convenience on the issue of interest payments.
Brief facts of the case taken from the record are that, during the relevant financial year, the assessee earned interest income of Rs.8,73,13,968/- and also debited interest expenses of Rs. 16,31,794/-. From the details of interest paid furnished during the course of assessment proceedings, it is seen that a total amount of Rs.16,31,794/- has been paid to various entities against the total unsecured loans taken amounting to Rs.1.20 crores during the year. A perusal of the balance sheet of the assessee also shows that an amount of Rs.268.74 crores has been shown as loans and advances given as at 31.03.2013. The corresponding figure as at 31.03.2012 was Rs.255.05 crores. During the course of assessment proceedings, the details of interest paid were called for to justify that the loans and advances have been made for the purpose of business activities only. The Assessing Officer examined whether any interest has been charged on the advance. The Assessing Officer held that the assessee is using interest bearing funds by giving advances to various other group concerns and individuals without charging any interest from them. Therefore, a proportionate disallowance out of the interest expenses claimed by the assessee was made by the Assessing Officer of Rs. 16,31,794/-.
It was argued before the revenue authorities that the Assessing Officer has made a notional computation of interest @ 15% on loans and advances of Rs 268.74 crores. It was argued that there can be no notional addition of interest on interest free loan and advances has been decided by the Hon'ble Delhi High Court in the case of Shivnandan Buildcon Pvt. Ltd. v CIT 2015 (5) 4 Deepak Dhar Gupta TMI 192. The ld. CIT (A) confirmed the addition holding that the burden lies on the assessee that interest free loans and advances were given from own funds and no nexus has been proved.
Before us during the argument, the ld. AR submitted that the details of the own funds available with the assessee. The ld. DR supported the order of the ld. CIT (A). The details of own funds and loans given are as under:
Details of Interest Free reserves available with the appellant AY 2009-10 AY 2010-11 AY 2011-12 AY 2012-13 AY 2013-14 514,875,000 578,625,000 648,000,000 711,950,000 791,409,000 Statutory Reserve 3,290,000 3,290,000 3,290,000 3,290,000 3,290,000 Capital redumption reserve Share Premium 7,750,000 7,750,000 7,750,000 7,750,000 7,750,000 account General 8,345,000 8,345,000 8,345,000 8,345,000 8,345,000 Reserve Surplus in profit arid 2,276,216,422 2,531,129,296 2,808,554,199 3,065,216,748 3,383,048,545 Loss account Total own funds 2,810,476,422 3,129,139,296 3,475,939,199 3,796,551,748 4,193,842,545 Total Loans and 2,432,503,976 2,230,416,670 2,563,334,206 2,550,497,117 2,687,485,465 advances including interest free advances
We find that the loans and advances including interest free advances are far less than the own funds. And hence, the presumption that the own funds have been utilized for extending the loans and advances sets in. When the assessee has got own funds available at their disposal, no disallowance is called for as enunciated in various judgments. The decision of Hon’ble Punjab & Haryana High Court in the case of Bright Enterprises Pvt. Ltd. Vs. CIT in dated 24.07.2015, it was held that if there are interest free funds available then it will be presumed that these have been made out of interest free funds. Similar view was held in the case of CIT Vs. Kapsons Associates Investment Pvt. Ltd. (2015) 381 ITR 204 (P&H) wherein, the Hon'ble Court has held that interest on investment in other properties not for business purpose cannot be disallowed if the assessee is having sufficient interest free funds at its disposal. Similar view was taken by the Hon'ble Supreme Court in the case of Hero Cycles Pvt. Ltd. 63 Taxman 308 held that no disallowance is called for if the assessee has got own surplus fund. 5 Deepak Dhar Gupta 12. Keeping in view the facts and circumstances of the case and the judicial pronouncements and keeping in view the fact that the assessee has got sufficient own funds to extend the loans interest free, we hereby direct that the disallowance made under section 36(1)(iii) be deleted.
The other ground relates to disallowance u/s 14A r.w.r 8D(2)(iii). The facts mentioned by the AO are that the revenue enquired vide query letter dated 26.06.2015 to provide the basis on which Rs.4,10,947/- has been disallowed u/s 14A. The assessee vide letter dated 23.04.2015 stated that while calculating the disallowance, the assessee company has not considered income of those investment, which are not changed last year. Since, no activity has been done on these investments, the allocation of expenses or disallowance of expenses on these investments is not at all justified. The Assessing Officer observed that the auditor has given the note in the year under consideration and in the Assessment Year 2012-13, that expenses were disallowed @ 0.5% in clause 17(1) of the audit report u/s 44AB in form 3CB/3CD. Hence, 0.5% of average value of investments which comes to Rs.44,90,230/- was disallowed as against Rs.4,10,947/-. The Assessing Officer relied on the judgment of Hon’ble Supreme Court in the case of CIT vs. United Trust Ltd 200 ITR 488 on preposition that proportionate management expenses should be deducted from gross dividend for the purpose of the deduction.
The ld. CIT (A) finds that the assessee during the AY 2013-14 had earned tax free dividend of Rs.33,34,17,195/- on the various investments made by it in the equity shares and units. During the year, the assessee had net loss on account of sale of long term equity shares on which no STT is paid of Rs.2,03,21,156/-. This loss is allowed to be carried forward as long term capital gains on which no STT is paid is taxable. Whereas, there was gain on sale of long term shares of Rs 21,18,743/-, on which loss is not allowed to be carried forward. Besides, the assessee had taken a position that any investment in equity shares over a period of less than one year shall be taken 6 Deepak Dhar Gupta as income from business and hence will be taxed at full rate of 30%. The ld. CIT (A) after due deliberation held that as per Rule 8D(2)(iii), the disallowance of Rs.44,90,230/- is justified.
Before us, the ld. AR argued that the disallowance u/s 14A should only with respect to actual expenditure and such expenses should be directly co- related with the exempt income. The only dispute of this ground is 0.5% has applied on the average investments. The ld. AR argued that earning dividends is not an assured activity, no business man will ever incur a recurring in anticipation of non-assured returns especially dividends. He further argued that the dividend earning was never the objective of the Company and thus finding has not been given by the Assessing Officer as to what was motive of the company of the invests Rs. 111 crores. The ld. AR argued that keeping in view the judgment of the Special Bench of ITAT in the case of Vireet Investment Pvt. Ltd. in vide order dated 16.06.2017, the non-dividend yielding investments ought to have been excluded.
Heard the arguments of both the parties and perused the material available on record.
The closing value of opening value of investment and average investment are as under:- Closing value of investments Rs.99,12,68,846 Opening value of investments Rs.80,48,23,266 Average value of investments Rs.89,80,46,056
The assessee has disallowed the expenses u/s 14A of Rs.4,10,947/-. Since, the assessee has not given any basis so Assessing Officer applied Rule 8D(2)(iii) and worked out disallowance of Rs.44,90,230/-.
The details of the investments – dividend yielding and non-exempt income is as under: 7 Deepak Dhar Gupta VIC ENTERPRISES PRIVATE LIMITED Non Current Investment as at 31st March 2013 As at 31.3.12 Dividend Income Particulars Quantity As at 31.3.13 Quantity Long Term Investment IN BONDS 6.70% Indian Railways Finance Corporation Ltd. Tax Rs.l Lac Each 1,000 100,000,0 1,000 100,000,000 8.20% Power Finance Corporation Bond 8,544 8,544,000 00 8,544 8,544,000 National Highway Authority of India 8.20% 10 years 7,417 7,417,000 7,417 7,417,000 8% India Railway Finance Corporation Ltd. Tax Free Each 63,244,37 7.93% Rural Electrification Corporation Ltd.Tax Free 146,366,7 Rs.1000/- Each 91 325,572,1 115,961,000 IN EQUITY SHARES IL& FS Demat-no.10033578 QUOTED AND FULLY PAID UP 18,486,41 Asian Hotels (East) Ltd. of Rs.10/- each 54,000 54,000 18,486,414 243,000 Asian Hotels (North ) Ltd. of Rs.10/- each 109,975 34,440,71 109,975 34,440,719 264,963 Asian Hotels (West) Ltd. of Rs.10/- each 71,608 22,215,77 71,608 22,215,771 308,632 Balrampur Chini Mills Limited - - 10,000 538,968 Crompton Graves 100,000 12,261,01 30,000 4,896,475 52,000 Cairn India Ltd. 30,000 9,137,003 32,500 Dabur India Ltd of Rs.1/- each 217,734,0 25,773,59 217,734,000 25,773,596 304,827,600 Deccan Chroncile 25,000 463,869 East India Hotel of Rs.2/- each - - 290,909 26,656,609 320,000 Future Capital Holding - 50,000 9,109,139 75,600 Fresenius Kabi Oncology 27,083 2,838,646 GVK Power & Infrastructure 500,000 6,248,577 250,000 3,176,500 HDFC Bank Ltd.of Rs.10/- each 873,500 46,032,37 912,500 48,087,628 3,923,750 Henkel India Ltd. 40,000 1,701,683 40,000 1,701,683 Hindustan Construction 100,000 3,064,250 100,000 3,064,250 India Co Venture Ltd.of Rs.2/- each 244,000 13,7.51,84 244,000 13,751,840 Indian Hotels of Rs.l/- each 100,000 4,283,068 100,000 4,283,068 Indorama Synthetic Ltd. - - 360,000 23,350,483 439,008 Karnataka Bank Ltd. 950,000 123,280,4 950,000 123,280,420 3,325,000 Lakshmi Vilas Bank 100,000 10,458,97 92,850 9,913,955 324,975 Manglore Chemical & Fertilizers Ltd. of Rs.10/- each 1,000,000 39,514,48 1,000,000 39,514,482 1,912,921 Mega Corp. Ltd. of Rs.1/- each 100,000 67,823 100,000 67,823 Moil Ltd. 3,785 1,419,375 3,785 1,419,375 18,925 NHPC Ltd. of Rs.10/-each 150,000 5,424,595 150,000 5,424,595 105,000 Pantaloon Retail 60,000 18,533,69 60,000 18,533,699 Punj Llyod Ltd. - - 85,000 10,578,443 25,950 PVP Venture Ltd. of Rs.l0/-each 500,000 8,837,193 500,000 8,837,193 Shree Renuka Sugar Ltd. 60,000 3,026,429 60,000 3,026,429 SJVN Ltd. 3,224,074 83,825,92 3,224,074 83,825,924 3,030,630 Tata Communication 20,000 4,569,494 20,000 4,569,494 40,000 Voltas Ltd. 80,000 7,106,192 - - Zuari Agro Industries Ltd. of Rs.10/- each 90,147 18,713,53 29,990 9,546,806 89,970 Zuari Global Ltd.of Rs.10/- each 29,990 4,339,023 - - 59,980 529,815,9 558,071,781 85 Kotak Mahindra Bank Demat-no. 10553664 QUOTED AND FULLY PAID UP Asian Hotels (East) Ltd. 3,050 728,525 3,050 728,525 13,725 Asian Hotels (North) Ltd. of Rs.10/- each 5,050 1,249,744 5,050 1,249,744 7,575 Asian Hotels (West) Ltd. 5,550 1,270,758 5,550 1,270,758 Dhampur Sugar 114,261 3,612,601 114,261 3,612,601 142,826 DLF Ltd 1,000 271,523 1,000 271,523 2,000 Eldeco Housing Financing Ltd. 14,843 2,991,497 11,832 2,388,240 GVK Power & Infrastructure 174,600 2,827,561 174,600 2,827,561 Hindustan Construction Co. Ltd. 42,500 1,566,024 42,500 1,566,024 Hindustan Petrolium Ltd. of Rs.10/- each 3,500 1,227,767 3,500 1,227,767 29,750 IDBI Bank Ltd. 5,500 712,933 5,500 712,933 8,250 IL & FS Investmart Ltd. of Rs.2/-each 42,845 645,021 42,845 645,021 64,268 India Overseas Bank 1,500 187,547 1,500 187,547 6,750 Indian Oil Corporation Ltd. of Rs.10/-each 4,070 1,011,515 4,070 1,011,515 20,350 Indorama Synthetic Ltd. 84,001 4,482,650 66,501 4,106,190 J.P. Hydro 27,000 1,049,364 27.000 1,049,364 J.P. Infratech Ltd. - - Mahindra Forgeing Ltd. of Rs.10/-each 386 85,280 386 - Manglore Chemical & Fertilizers Ltd. of Rs.10/- each 611,601 18,117,649 574,101 85,280 MIRC Electronics Ltd. of Rs.1/- each 13,243 306,788 13,243 16,586,306 Network 18 Media and Investment Ltd. of Rs.5/-each 8,846 1,328,971 8,846 306,788 230,299 Poly Plex Corporation Ltd. 46,950 8,064,379 40,700 1,328,971 RSWM Ltd. of Rs. 10/-each 5,000 566,314 5,000 7,087,260 47,000 SJVN Ltd. 50,101 1,185,386 50,000 566,314 10,875 State Bank of Bikaner & Jaipur 750 371,520 750 1,183,350 2,000 Voltas Limited 1,250 126,117 1,250 371,520 7,812 Zuari Agro Industries Ltd. of Rs.10/-each 2,604 495,034 2,604 126,117 5,208 Zuari Golbal Ltd. of Rs.10/- each 2,604 412,453 907,487 54,894,918 51,404,704 Barclays Securities India Pvt. Ltd. Demat A/c 10006282 QUOTED AND FULLY PAID UP Andhra Sugar - - Citi Union Bank of Rs.1/- each - - IN EQUITY SHARES UNQUOTED AND FULLY PAID- UP IN SUBSIDIARIES :- 9,000 90,000 9,000 90,000 Betteroption Estate Pvt. Ltd. of Rs.10/- each 8,000 80,442 8,000 80,442 Buman Resorts Pvt. Ltd. of Rs.10/- each 10,000 100,000 10,000 100,000 Hillgrow Infracon Pvt. Ltd. of Rs.10/ each 17,101 233,285 17,101 233,285 Newage Capital Services Pvt. Ltd. of Rs.10/- each - - - - S2 Property Pvt. Ltd. of Rs. 10/- each 340,010 2,190,032 340,010 2,190,032 Sunshine India Pvt. Ltd. of Rs.10/- each 10,000 100,000 Touchstone Fund Advisors Pvt. Ltd.
IN OTHERS:- A.V.B. Finance Pvt. Ltd. of Rs.10/- each 3,450,010 30,807,508 3,450,010 30,807,508 Ayurvet Ltd. of Rs. 10/- each 16,665 166,790 16,665 166,790 41,662 Bonjour Investment Co. Pvt. Ltd. of Rs.10/- each Dabur 184,750 1,847,500 184,750 1,847,500 Ayurvedic Spc. Ltd. of Rs. 10/- each 12,415 124,268 12,415 124,268 Dabur Pharmaceuticals Ltd. of Rs. 10/- each Dabur 13,500 45,040 13,500 45,040 Securities Pvt. Ltd. 789,370 7,895,4000 789,370 7,895,400 Dr. Fresh Real Estate Venture Pvt. Ltd. Of Rs.10/- Garner 50,000 500,000 50,000 500,000 Finance & Securities Pvt. Ltd. 66,000 29,040,000 66,000 29,040,000 Maneswari Trading Co. of Rs.100/- each 6,150 615,515 6,150 615,515 Numro Uno International Ltd. of Rs.10/-each 26,000 5,201,300 26,000 5,201,300 Sunehari Exports Limited of Rs. 10/- each 55,000 550,000 55,000 550,000 Sonakashi Market Pvt. Ltd .of Rs.10/- each 10,500 2,100,000 10,500 2,100,000 10% NCD MG Burman Capital Advisors Pvt.Ltd.10/- each 9,000,000 90,000,000 9,000,000 90,000,000 Less :- Provision for Dimunition in Value of Investment -5,201,300 -5,201,300 166,485,780 166,385,780 Investment in PMS 4,500,000 3,000,000 Kaizen Trust_domestic Scheme-1 4,500,000 3,000,000 Other Investment in Movable Properties:- 1,355,129 1,355,129 JEWELLERY * 22,140,500 22,140,500 Painting 3,175,000 3,175,000 Artifacts of Ruby Stone Total in 1,107,939,475 921,493,895 320,060,154 921,493,895 9 Deepak Dhar Gupta VIC ENTERPRISES PRIVATE LIMITED VIC ENTERPRISES PRIVATE LIMITED Details of Non Current Investment from which no exempt income has been earned in AY 2013-14 As at 31.3.2011 As at 31.3.2010 Total Investments other than Jwellery, Painting, Artifact & NCD 991,268,846 804,823,266 Less:- Investment from which no dividend received during the year 6.70% Indian Railways Finance Corporation Ltd. Tax Free Bond of Rs. 1 Lac Each 100,000,000 100,000,000 8.20% Power Finance Corporation Bond 8,544,000 8,544,000 National Highway Authority of India 8.20% 10 years bonds 7,417,000 7,417,000 8% India Railway Finance Corporation Ltd. Tax Free bonds of 1000/- Each 63,244,372 - 7.93% Rural Electrification Corporation Ltd. Tax Free Bonds of Rs.1000/- Each 146,366,791 - Balrampur Chini Mills Limited - 538,968 Deccan Chroncile 463,869 - Fresenius Kabi Oncology 2,838,646 - GVK Power & Infrastructure 6,248,577 3,176,500 Henkel India Ltd. 1,701,683 1,701,683 Hindustan Construction 3,064,250 3,064,250 India Co Venture Ltd. of Rs.2/- each 13,751,840 13,751,840 Indian Hotels of Rs.1/- each 4,283,068 4,283,068 Mega Corp. Ltd. of Rs.1/- each 67,823 67,823 Pantaloon Retail 18,533,699 18,533,699 PVP ventule Ltd. of Rs.l0/-each 8,837,193 8,837,193 Shree Renuka Sugar Ltd. 3,026,429 3,026,429 Voltas Ltd. 7,106,192 - Asian Hotels (West) Ltd. 1,270,758 1,270,758 Eldeco Housing Financing Ltd. 2,991,497 2,388,240 GVK Power & infrastructure 2,827,561 2,827,561 Hindustan Construction Co. Ltd. 1,566,024 1,566,024 Indorama Synthetic Ltd. 4,482,650 4,106,190 J.P. Hydro 1,049,364 1,049,364 J.P. Infratech Ltd. - - Mahindra Forgeing Ltd. of Rs.10/-each 85,280 85,280 Manglore Chemical & Fertilizers Ltd. of Rs.10/- each 18,117,649 16,586,306 MIRC Electronics Ltd. of Rs.1/-each 306,788 306,788 Network 18 Media and Investment Ltd. of Rs.5/-each 1,328,971 1,328,971 RSWM Ltd. of Rs. 10/- each 566,314 566,314 Barclays Securities India Pvt. Ltd. Demat A/c 10006282 - - Andhra Sugar - - Citi Union Bank of Rs.1/- each - - Betteroption Estate Pvt. Ltd. of Rs.10/- each 90,000 90,000 Buman Resorts Pvt. Ltd. of Rs.10/- each 80,442 80,442 Hillgrow Infracon Pvt. Ltd. of Rs.10/- each 100,000 100,000 Newage Capital Services Pvt. Ltd. of Rs.10/- each 233,285 233,285 S2 Property Pvt. Ltd. of Rs. 10/- each - - Sunshine India Pvt. Ltd. of Rs.10/- each 2,190,032 2,190,032 Touchstone Fund Advisors Pvt. Ltd. 100,000 - A.V.B. Finance Pvt. Ltd. of Rs.10/- each 30,807,508 30,807,508 Bonjour Investment Co. Pvt. Ltd. of Rs.10/- each 1,847,500 1,847,500 Dabur Ayurvedic Spc. Ltd. of Rs. 10/- each 124,268 124,268 Dabur Pharmaceuticals Ltd. of Rs. 10/- each 45,040 45,040 Dabur Securities Pvt. Ltd. 7,895,400 7,895,400 Dr.Fresh Real Estate Venture Pvt. Ltd. Of Rs.10/- 500,000 500,000 Garner Finance Si Securities Pvt. Ltd. 29,040,000 29,040,000 Maneswari Trading Co. of Rs.100/- each 615,515 615,515 Numro Uno International Ltd. of Rs.l0/-each 5,201,300 5,201,300 Sunehari Exports Limited of Rs. 10/- each 550,000 550,000 Sonakashi Market Pvt. Ltd. of Rs.10/- each 2,100,000 2,100,000 10% NCD MG Burman Capital Advisors Pvt.Ltd.10/- each 90,000,000 90,000,000 Less :- Provision for Dimunition in Value of Investment (5,201,300) (5,201,300) Investment in PMS - Kaizen Trust _domestic Scheme -1 4,500,000 3,000,000 Total Investments on which no dividend was received 600,907,279 374,243,239 Balance Investments 390,361,568 430,580,026 Average of Balance Investments 410,470,797 0.5% of Average investment 2,052,354
ITA No. 2340/Del/2017 10 Deepak Dhar Gupta 20. The Hon’ble Delhi High Court primarily decided the issue regarding applicability of section 14A even if no dividend income was earned. The Hon’ble High court in its decision observed as under: “14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad vs. MIs. Lakhani Marketing Incl., decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT vs. Hero Cycles Limited, [2010]323 ITR 518 and CIT vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is Of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (Ii) Kanpur, vs. MIs. Shivam Motors (P) Ltd. decided on 05.05.2014. In the said decision it has been held:-
"As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, 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. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance…………..”
The Courts further held that the income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether Income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term. capital gain on sale of shares is presently not taxable where 11 Deepak Dhar Gupta security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not all improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.”
Hence, keeping in view the legal and factual position of the case, we hereby hold that the disallowance needs to be restricted to the dividend yielding investment only for the years involved. The Assessing Officer is hereby directed to re-compute the disallowance taking into consideration, the dividend yielding investments.
In the result, we hereby hold that (a) No disallowance on the interest is required when the assessee has got sufficient own funds at their disposal to lend/advance. (b) The disallowance under Rule 8D(2)(iii) be restricted to dividend yielding investments to determine the average value of the investments.
The appeals of the assessee are hereby allowed. Order Pronounced in the Open Court on 29/01/2020.