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Income Tax Appellate Tribunal, DELHI BENCH “F” NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
O R D E R PER AMIT SHUKLA, JM:
The aforesaid appeal has been filed by the Revenue against the impugned order dated 10.01.2017, passed by Commissioner of Income Tax (Appeals)-XXXVI, New Delhi for the quantum of assessment passed u/s.143(3) for the Assessment Year 2012-13. In the grounds of appeal the assessee has raised following ground:
1. On the facts and in the circumstances of the case and in law the ld. CIT(A) has erred in law in deleting the addition of Rs.25,30,80,822/- made by the Assessing Officer without appreciating the fact that the funds borrowed by the assessee were utilized for the purpose of investment and as such the disallowance of interest on funds used for investments was merited as per the provision of section 14A of the Income Tax Act irrespective of whether dividend and been declared or not.”
The facts in brief are that the assessee-company was incorporated on 22nd December, 2009 and was noted by the Assessing Officer in the assessment order. It was engaged in the business of providing consultancy relating to investment, acquiring, holding, procuring, purchasing of all types of securities. Assessing Officer from the perusal of the balance sheet noted following position:-
As at March 31, 2012 As at March 31, 2011 Share Capital Rs.4,01,00,000/- Rs.1,00,000/- Reserve and Surplus Rs.3,93,64,99,858/- Rs. (2,40,55,991) Short term borrowing Rs.2,48,74,00,000/- Rs.4,10,32,00,000/) Non current Rs.4,00,00,00,000/- - Rs.2,00,00,00,000/- Investment (Rs.400 crore) (Rs.200 crore)
On the application of funds shown in the balance-sheet Assessing Officer noted that in the beginning of the year entire investment of Rs.200 crore was funded by short-term interest-bearing borrowings and only Rs.1 lakh towards equity capital was available towards interest free funds. Thus, there was a direct clear nexus of utilization of borrowed funds for the purpose of making investments. Further, assessee has shown interest income of Rs.53,19,75,237/- as ‘other income’ in the P&L account and claimed expenses towards ‘interest and finance cost’ amounting to Rs.53,13,31,859/- and other expenses of Rs.17,529/-. The resultant profit was shown at Rs.8,25,849/-. He further noticed that the assessee has received Optionally Convertible Preference Shares valuing Rs.400 crore from six parties, the details of which has been given at page 2 of the assessment order. The Assessing Officer has also noted the details of investments made by the assessee during the year in M/s. Shivshakti Financial Services Pvt. Ltd. for Rs.200 crore. The Assessing Officer further noticed that assessee has given interest on all the funds borrowed by it at the rate of interest ranging from 8% to 12.5%. However, funds which were converted into investment in the books carried a rate of interest of 10.25%. After taking note of these facts, Assessing Officer asked the assessee as to why the interest expense relatable to investment should not be disallowed as the investment would either result in capital gains or exempt income or both. The assessee’s submission was that during the year under consideration, the assessee has not earned any exempt income, and therefore, the provisions of section 14A read with Rule 8D cannot be applied. Further, assessee has not earned any exempt income from the investment on 31.03.2012 and in the later year also till their redemption. The investments were redeemed during the Financial Year 2014-15. The ld. Assessing Officer observed that, firstly, interest expense is not related to business as assessee company is not an NBFC and hence is not allowable u/s.36(i)(iii) nor u/s.57(iii). Thereafter, he made total disallowance of Rs.25,30,80,822 u/s. 14A of the Act. The Assessing Officer’s findings and observations read as under:
“Section 36(i)(iii) of the I.T Act allows deduction from the profit of business or profession, the amount of interest paid in respect of capital borrowed for the purpose of business or profession. As stated above, the assessee is not an NBFC. It is not the business of the assessee to earn income from investments made. In the Memorandum of association also, its business activity relates to consultancy in financial matters. In the profit and loss account and computation of income it has shown the interest receipt as "other income". The company has rightly not claimed allowance of expenditure invoking the provisions of section 36(1)(iii) of the I.T Act. However, if at any stage, such submission is made, then also it is held that the same would be not allowable. The AO mentioned 5LP in the case of M/s. Tulip Star Hotels Limited (ITR) & stated that it is clear that the interest expense relatable to investment is not allowable u/s. 36(l)(iii) of the I.T Act. There is no mention of what amount of interest is relatable to how much of investment. (ii). Assessee has in its notes to balance sheet admitted that it is not into the business of giving loan and making investment but it provides consultancy services in this regard. The assessee in its profit and loss account itself has claimed the interest income, not as revenue from operations but as "other income". As such it is clear that the assessee is entitled only to deduction of expenses available against income from other sources. Thus, only those interest expenses which is expended towards earning of interest income is allowable to the assessee as per the provision of section 57(iii) of the I.T Act. As such, interest relatable to investment made is not allowable. There is no other income shown by the assessee against which such interest expenditure can be claimed allowable u/s. 57(iii) of the I.T Act.
(iii). The investment made in the form of preference shares by the assessee would yield dividend income and if sold would result in capital gains. The dividend income is exempt by virtue of section 10 of the I.T Act. As per the provisions of section 14A of the Act, any expenditure relatable to earning of exempt income is taxable. The assessee has not made any disallowance towards exempt income though the investment made above is clearly out of the borrowed funds. There is direct nexus between the interest expenses relatable to fund, which is used for the purpose of investment. As such the claim of the assessee that no expense was incurred for earning exempt income is without any basis. There was no dividend earned by the assessee. Delhi Special Bench of the ITAT in Cheminvest Ltd. v ITO (2009) 121 ITD 318 (Del) (SB) took a view that when the expenditure is incurred in relation to exempt income, it has to suffer disallowance irrespective of the fact whether any exempt income is earned by the assessee or not. Total disallowance of Rs. 25,30,80,822/- is made u/s. 14A of the I.T Act. This is notwithstanding the grounds taken for the disallowance of interest expense under other provision of the Act.”
Ld. CIT(A) after perusing the entire facts, material on record and the submissions made by the assessee as well as the order of the Assessing Officer noted that the financial statement reflected that interest income is from inter corporate deposits and the expenses are also on interest on inter corporate deposits. Thus, they are similar in nature. The interest income is of Rs.53,19,75,237/- and interest expenditure is Rs.53,13,31,859/- out of which Assessing Officer has made disallowance u/s.14A read with Rule 8D of Rs.25,30,80,882/- which was without prejudice to the interest expenditure disallowable u/s.36(1)(iii) or u/s.57(iii) of the Act. Admittedly, the assessee does not have any exempt income except source of income and also there is no dividend income received during the year. The Assessing Officer had relied upon the decision of ITAT Delhi Bench in the case of Cheminvest which has now been reversed by Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT, as reported in 378 ITR 33 (Del) wherein it has been held that disallowance u/s. 14A will not apply if there is no exempt income regarding other alternative disallowance made by the ld. Assessing Officer, was in the following manner: - “(i) Since the assessee is not an NBFC and its business activities relates to consultancy in financial matters, the interest is not allowable as there is use of borrowed funds for making investments. (ii) Since the assessee has mentioned the income as ''other income” in the P&L a/c. and there is no nexus between the interest earned and interest paid, the amount is disallowed u/s. 57(iii) of the Act. (iii) Since the investment made could turn into capital gains later the direct interest expenses relatable to holding of investment is not allowable.”
Ld. CIT(A) held that in this case the assessee had not shown income as ‘income from other sources’ nor has been claimed, therefore, section 57(iii) is not relevant. In so far as disallowance u/s.36(1)(iii) is concern, she held that though the assessee is not a NBFC, however, the funds used were both for forwarding of loans and investment in share capital which did not yield dividend income during the year. The Assessing Officer has not discussed as to whether, where the interest income has been shown as business income and what will happened to the interest income and having direct nexus with that business income. The relevant observation of the ld. CIT(A) in this regard reads as under: “Only issue that remains is of disallowance u/s. 36(1)(iii). In this case although the applicant is not an NBFC, it is seen that the funds are used for both forwarding of loans and investments in share capital which did not have any dividend income during the year. The AO has not discussed that in case where the interest earned is considered as business income then what would happen to the expenses on interest (on similar inter corporate deposits), which have actually been made. It is not the case of the AO that the assessee has adopted any colourful device or dubious method or that the interest was not actually paid on amount borrowed for business purpose which may include investment in other companies. The assessee has relied upon a number of case laws wherein it has been decided that the purpose of business does not have a narrow view and interest expense, if it has been incurred in the course of business of the assessee is allowed even if there is no income. It is also observed that the AO has not even quantified or separated the amount of the interest that he holds as disallowable u/s. 36(1)(iii) of the Act and has merely mentioned/that interest expense relatable to investment is not allowable u/s. 36(l)(iii) of the Act.”
Before us, the ld. CIT-DR after referring to the various observations made by the Assessing Officer also referred to CBDT circular no.5/15 dated 11th February, 2014 wherein it was stated that for invoking disallowance u/s.14A it is not material that assessee should have earned dividend income during the financial year. She has also referred to the judgment of Hon’ble Apex Court in the case of Maxopp Investment Ltd., as reported in (2018) taxmann.com 154 and reiterated the following principle of Hon’ble Apex Court. “(i) Only that expenditure which is in relation to earning dividends can be disallowed under section 14A and rule 8D. (ii) The dominant purpose for which investment into shares is made by assessee may not be relevant as section 14A applies irrespective of whether shares are held to gain control or as stock- in-trade. However, where shares are held as stock-in-trade, main purpose is to trade in those shares and earn profits therefrom and, in process, certain dividend is also earned which is tax exempt under section 10(34); expenditure attributable to exempt dividend income will have to be apportioned to be disallowed under section 14A. (iii) Rule 8D is prospective in nature and could not have been made applicable in respect of assessment years prior to 2007 when this rule was inserted.”
She also referred to judgment of Hon’ble Supreme Court in the case of CIT vs. Walfort Share and Stock Brokers P. Ltd., as reported in (2010) 326 ITR 1 (SC) on the issue of disallowance u/s.57(iii) and 36(1)(iii) made by the Assessing Officer. She strongly relied upon the order of the Assessing Officer whereas assessee is not a NBFC and how the interest expenditure cannot be treated as business expenditure and therefore, Assessing Officer has rightly disallowed the same.
On the other hand, ld. counsel for the assessee strongly relied upon the order of the Assessing Officer and ld. CIT(A) and submitted that in the Assessment Year 2011-12, the Tribunal in assessee’s own case has allowed interest expenditure as ‘business expenditure’.
After considering the rival submissions and on perusal of the relevant findings given in the impugned order, we find that, first of all, the Assessing Officer has finally made the addition u/s.14A read with Rule 8D. It is an admitted fact that no dividend income has been earned by the assessee neither in this year nor in the subsequent years. Thus, in view of the judgment of Hon’ble Jurisdictional High Court in the case of Cheminvest Ltd. vs. CIT, 378 ITR 33 (Del), no disallowance u/s.14A can be made. Moreover, the Tribunal in assessee’s own case has held that the ‘interest income’ and ‘interest expenditure’ were directly linked to the business of the assessee. The relevant observation and the finding of the Tribunal reads as under: “9. The ground No. 1 - 3 of the appeal of the assessee pertains to the disallowance of interest of Rs.31,26,79,151/-.
We have carefully considered the rival contentions and orders of the lower authorities. We have also perused the relevant documents produced by the assessee in the form of paper book as well as various decisions cited before us as far as they are relevant in deciding the issue before us. Undoubtedly, assessee is a company of India Bulls group. It has received unsecured loans of Rs. 3931.32 crores from 10 companies on interest at the rate of 9% to 13%. It has also repaid Rs. 3521.07 crores to these companies. Therefore,
assessee has paid interest of Rs. 312, 673, 614 /- during the year. The surplus fund from above loans of the assessee of Rs. 410.25 crores was further lent to 6 companies and earned interest thereon at the rate of 9% to 52% amounting to Rs. 289,351,352/-. Therefore, there is interest loss incurred by the assessee from the transactions entered into for providing loans and obtaining loans. It is interesting to note that from Shiva Shakthi financial services private limited, assessee has obtained loan of Rs. 31 crores which was repaid during the year and interest has been paid to this company of Rs. 197,260/-. The rate of interest stated to be 12%. The assessee has also received interest from this company on loan granted of Rs. 1322.3 crores which was repaid by that company to the extent of Rs. 1222.3 crs but has paid interest to the assessee of Rs. 261,277,098/- at varying rates ranging from 9% to 52%. Further memorandum of Association of this company provides that this company can give loans and borrow loans. The main contention of the Ld. AO is that assessee is not carrying on any business and lending and borrowing of the funds is not the business of the company as Assessee Company is not registered as a nonbanking financial companies with the Reserve Bank Of India. We appreciate the concern of the Ld. assessing officer however, we failed to comprehend that why borrowing and lending of the funds cannot be considered as a business. Further absence of any registration certificate with the assessee in accordance with the RBI directions applicable to nonbanking financial companies will not make any material difference in assessing the correct income of the assessee. It may be an offence under the particular directions of the reserve bank of India issued in 1998. Furthermore, it cannot be said that assessee has not borrowed for the purpose of the business when the same money is lent, interest is earned and same is taxed as business income. In fact, out of the transactions with 16 companies of borrowing and lending of the funds, the Ld. assessing officer has not stated that any of the loans given by the assessee does not carry interest. Therefore, all the transactions of borrowing and lending of the money entered into by the assessee are carrying interest at varying rates. For this assessee has submitted a chart showing period of finance, amount financed and rate of interest with interest earned and paid. The assessee is paying interest maximum at the rate of 25% and that too to IndiaBulls financial services Ltd for a limited period of September to December. The same company is also paid interest of to the August 2010 at the rate of 9% and from January to March 2011 at 14%. Therefore all the loans taken by the assessee are generally carrying interest rate of 9% to 13% except in case of one transaction where the rate of interest has gone up to 25%. The analysis of the interest received by the assessee shows that assessee is receiving interest at the rate of 9% to 12% generally. In one case of Shiv Shakthi financial services private limited where the assessee has earned interest of Rs. 261,277,098/- the rate of interest in the month of May to July was 27%, from July to September 36 percent, from October to December 52% and from January to March 45 percent. The Ld. AO as well as the Ld. departmental representative before us could not controvert these transactions of the assessee. Therefore on analysis of the details of interest paid and received by the assessee it is apparent that assessee is engaged in the business of money lending. Hence, the natural corollary that follows is that assessee is incurring interest expenditure for the purpose of its business. We have also carefully perused the assessment order passed by the Ld. AO for assessment year 2012 - 13. It is not disputed by the revenue that identical situation prevailed therein also. In that particular assessment years the Ld. assessing officer has disallowed the interest expenditure of Rs. 23,80,80,822/- by applying the provisions of section 14 A of The Income Tax Act and not under sections 36 of the Act. On appeal such disallowance under section 14 A is deleted. This similar disallowances are also made under section 14 A for assessment year 13-14 also. However, no disallowance was made under section 36 of the act. For assessment year 2010 - 11, the assessee was assessed under section 143 (3) of the income tax act. There was no such disallowance because of interest expenditure. On perusal of the balance sheet as at 31/3/2010 where the assessee has earned interest income of Rs. 1256 7671/- and paid interest of Rs. 13386301/- from the period 22/12/2009 to 31/3/2010. In fact if the disallowance is made u/s 14A of the Act, it is admitted by revenue that this expenditure though otherwise allowable to the assessee is disallowable as it has been incurred in relation to exempt income. Hence, for the following reasons we direct the Ld. assessing officer to delete the disallowance of interest that a. all the loans made by the assessee are only interest and all the loans received by the assessee also carry interest, b. the interest rates carried by the loans given and taken by the assessee are not disputed c. the interest income earned by the assessee is taxed as business income d. in the earlier years on the identical facts the interest expenditure has been disallowed and there is no action taken to disturb that assessment year e. in the subsequent years the interest disallowance has not been made under section 36 but under section 14A of the income tax act which to what deleted before the 1st appellate authority. f. provision in the memorandum of Association permitting the assessee company to grant and receive the loans.”
10. Thus, when there is a direct nexus between the direct earning and direct investment, no disallowance u/s.36(1)(iii) can be made. In so far as Section 57(iii) is concerned, admittedly it is not in dispute that the ‘interest expenditure’ has been assessed as ‘business income’, therefore, no disallowance u/s.57(iii) can be made.
In the result, the appeal of the Revenue is dismissed. Order pronounced in the open Court on 1st October, 2019.