TATA INDUSTRIES LIMITED,MUMBAI vs. ADDL.C.I.T., RANGE-2(3), MUMBAI

The CIT(A) erred in confirming the disallowance of legal & Professional fees of Rs.1,47,88,487/- paid by the Appellant, for the purpose of computing income from Business or Profession.”

The relevant facts in brief are the Assessee filed return of income for the Assessment Year 2005-06 on 31/10/2005, declaring total loss of INR 2,99,16,019/-. The case of the Appellant was selected for scrutiny, the Assessing Officer 2 completed the assessment under Section 143(3) of the Act vide order, dated 28/12/2007, assessing total income of the appellant at INR 79,08,78,040/- after making, inter alia, following addition/disallowances: (a) Disallowance of gross interest expenditure of INR.70,26,64,011/- and administrative expenses of INR.14,09,00,000/- invoking the provisions of Section 14A of the Act and Rule 8D of the Income Tax Rules, 1962 (b) Disallowance of brokerage expenses of INR. 1,57,65,808/- (c) Disallowance of Debenture Issue Expenses of INR.14,82,902/- (d) Addition of INR 57,534/- and INR 27,20,110/- in respect of the Guarantee Commission Income (e) Disallowance of Legal & Professional fees of INR.1,47,88,487/-

Being aggrieved the appellant carried the issue in appeal before the CIT(A). However, the CIT(A) decline to give any relief on the above issues. Agreeing with the Assessing Officer, the CIT(A) dismissed the grounds raised by the Appellant challenging the above additions/disallowances made by Assessing Officer vide order dated 26/03/2009.

Being aggrieved, the Appellant carried the issue in appeal before the Tribunal. The Appellant thereafter filed additional/supplementary grounds of appeal. However, vide letter dated 19/01/2024, the Appellant restricted the challenge to the revised grounds of appeal reproduced in paragraph 2 above which are taken up hereinafter in seriatim.

Ground No. 1 Ground No. 1 raised by the Appellant pertains to disallowance 3 under Section 14A of the Act while computing taxable income under normal provisions of the Act as well as while computing the 'Book Profits' for the purpose of Section 115JB of the Act.

The relevant facts in brief are that during the assessment proceedings, the Assessing Officer noted that the Appellant had earned dividend income as well as Long Term Capital Gains income which was exempt from tax. Therefore, the Appellant was asked to furnish details of suo moto disallowance of INR 37,44,33,000/- made by the Assessing Officer under Section 14A of the Act. Vide letter dated 17/12/2007, the Appellant furnished the required details and submitted that only interest expenditure has been considered while computing disallowance under Section 14A of the Act. Thereafter, vide Letter dated 17/12/2007, the Appellant, on a without prejudice basis, submitted that total value of investments in respect of which dividend income has been received was INR 47.43 Crores as against the total investment of INR 1,803.77 Crores. Therefore, it was contended that the disallowance under Section 14A of the Act be restricted to INR 47.43 Crores only.

The Assessing Officer noted that vide Letter, dated 14/12/2007, the Appellant had furnished detailed break-up its activities wherein it was stated that for the relevant previous year total Head Office Expenses stood at INR 84.35 Crore which included interest of INR 70.26 Crores. The Assessing Officer noted that the Appellant had borrowed funds of INR 1,013.10 Crores and held investments of INR 1,781.04 Crores. According to the Assessing Officer there was direct nexus between borrowed funds and investment since the Appellant was involved in making investments in ventures and companies promoted by it. According to the Assessing Officer, by claiming deduction for 4 interest under Section 36(1)(iii) of the Act, the Appellant had indirectly admitted that entire interest expenditure was related to borrowing which had resulted in investment. Therefore, the Assessing Officer disallowed entire interest expenditure of INR

26 Crores. Further, the Assessing Officer also disallowed the balance Head Office Expenses of INR 14.09 Crores holding that the same were also incurred for the purpose of making investments yielding tax exempt income. Thus, the Assessing Officer computed disallowance of INR 84.35 Crores [as against INR 37.44 Crores computed by the Appellant] under Section 14A of the Act for the purpose of computation of income under normal provisions of the Act as well as for the purpose of computation of 'Book Profit' under Section 115JB of the Act.

In appeal before the CIT(A), the Appellant reiterated its submission made before Assessing Officer and in addition submitted that the Assessing Officer had made disallowance adopting methodology different from the methodology previously adopted by the Assessing Officer in the preceding

Being aggrieved the Appellant has carried the issue in appeal before us. In the Original Grounds of Appeal filed by the 5 Appellant along with memorandum of appeal, the Appellant had taken a number of grounds in relation to this disallowance under Section 14A of the Act. However, vide letter dated, 19/01/2024, the Appellant filed revised grounds wherein the Appellant restricted its claim. As per revised grounds the Appellant had primarily pleaded that the disallowance under Section 14A of the Act should be restricted to INR 6,88,73,913/- being amount of exempt income earned by the Appellant during the relevant previous year

The Learned Authorised Representative for the Appellant submitted that in identical facts and circumstances in the case of the Appellant for the Assessment Year 2004-05, the Tribunal has, vide order dated 20/07/2016, passed in ITA No. 4894/Mum/2008 [181 TTJ 600 (Mumbai - Trib)] decided this issue raised in Ground No. 1 in favour of the Appellant by restricting the disallowance under Section 14A of the Act to the amount of exempt income.

However, the Learned Special Counsel for the Revenue appearing before us vehemently insisted that the issue required reconsideration. Learned Special Counsel for Revenue relied on written submission dated 04/02/2024 and 17/11/2021 and extracts of judicial precedents reproduced therein. Reliance was also placed on the following judgments/decisions: (a) Everplus Securities & Finance Vs Deputy Commissioner of Income Tax: 2006 285 ITR 112 (Delhi); (b) ACIT Range 10(1) Vs Citicorp Finance India Limited: 2008 300 ITR 398 (Mumbai)' (c) CIT Vs. Amrita Ben R Shah: 238 ITR 777; and (d) CIT Vs KS Venkatasubbiah Reddiar: 221 ITR 18.

We have given thoughtful consideration to the rival submissions 6 and perused the material on record including the various judicial precedents cited by both the sides.

On perusal of the assessment order for the Assessment Year 2005-06, we find that the Assessing Officer had made disallowance under Section 14A of the Act. No disallowance was made under Section 36(1)(iii) of the Act. Therefore, the observations made by the Assessing Officer in the context of Section 36(1)(iii) of the Act as well as the submission made by both the sides on this issue as well as the judicial precedents related thereto do not require our consideration. Having recorded as aforesaid, we taken note of the submission advanced by the Learned Revenue Counsel that while claiming deduction for expenses the Appellant had itself claimed that there was direct nexus between the interest income and investment made in companies to acquire controlling interest. On the basis of the aforesaid, it was submitted by the Ld. Revenue Counsel that entire amount of interest was correctly disallowed by the AO and CIT(A) by invoking provisions of Section 14A of the Act since the entire interest expense was incurred in relation to earning exempt dividend and capital gains income. The Learned Special Counsel for the Revenue had vehemently contended that the theory of appropriation of expenses could not be applied in the facts of the present case. Reliance in this regard was placed on the judgment of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT: (2012) 347 ITR 272. We have given thoughtful consideration to the submissions advanced by the Learned Revenue Counsel, and in our view, the same are devoid of merit as explained hereinafter.

The appeal before us pertains to Assessment Year 2005-06. In 7 it was held by the Hon'ble Delhi High Court, vide order dated 18.11.2011 passed in ITA No. 687/2009 & ors, that the provision of Section 14A of the Act inserted by virtue of the Finance Act, 2001 would come into retrospective effect from 01/04/1962. However, Rule 8D would apply prospectively from the Assessment Year 2007-08 onwards. As regards prior periods, in absence of any prescribed method, the assessee was free to adopt a reasonable and acceptable method. However, before doing so the Assessing Officer was first required to reject the claim/computation of the assessee giving cogent reasons before adopting any method to determine the quantum of disallowance under Section 14A of the Act. The relevant extract of the judgment of the Hon'ble Delhi High Court reads as under: "Questions

Since, across these appeals, there were some minor differences in language insofar as the admitted and/or proposed questions were concerned, it was agreed that the following substantial questions of law would, in general, cover all the cases before us:

As regards Question 1, it has been contended on behalf of the assessees that holding of shares for acquiring and retaining control of operating companies amounts to business and, consequently, dividend income on such shares is in the nature of business income. It was further submitted that the intention behind acquiring such shares was not to earn dividend but to acquire and retain a controlling interest in the operating companies. Dividend was merely incidental. It was thus contended that the interest paid on the funds borrowed to acquire such shares was allowable as a business expenditure as it was not directed at earning dividend income, which was incidental. The law prior to insertion of Section 14A

Prior to the introduction of section 14A in the said Act, the position in law was as laid down by the Supreme Court in CIT v. Maharashtra Sugar Mills Ltd: 82 ITR 452 (SC) and Rajasthan State Warehousing Corporation v. CIT: 242 ITR 450 (SC). In Maharashtra sugar Mills Ltd (supra) the assessee's business comprised of two parts, namely, (1) cultivation of sugar cane and (2) the manufacture of sugar. The revenue had contended that as the income from the cultivation of sugar cane, being the result of an agricultural operation, was not exigible to tax, therefore, any expenditure incurred in respect of that activity was not deductible. The Supreme Court repelled this contention in the following manner: "This contention proceeds on the basis that only expenditure incurred in respect of a business activity giving rise to income, profit or gains taxable under the Act can be given deduction to and not otherwise. We see no basis for this contention. To find out whether the deduction claimed is permissible under the Act or not, all that we have to do is to examine the relevant provisions of the Act. Equitable considerations are wholly out of place in construing the provisions of a taxing statute. We have to take the provisions of the statute as they stand. If the amount claimed is permissible under the Act then the same has to be deducted from the gross profit. If it is not permissible under the Act, it has to be rejected. As mentioned earlier, it is not disputed that the cultivation of sugar- cane and the manufacture of sugar constituted one single and indivisible business. Section 10(2) says that profits under section 10(1) in respect of a business 9 should be computed after deducting the allowances mentioned therein. One of the allowances allowed is that mentioned in section 10(2)(xv) which says that any expenditure laid out or expended wholly an exclusively for the purpose of such business shall be ducted as an allowance. The mandate of section 10(2) (xv) is plain and unambiguous. Undoubtedly, the allowance claimed in this case was laid out or expended for the purpose of the business carried on by the assessee. The fact that the income arising from a part of that business is not exigible to tax under the act is not a relevant circumstance." (Emphasis supplied)

Thus, prior to the introduction of section 14A in the said Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of the said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the 'exempt' income or income not exigible to tax, was not allowable as a deduction. XX XX

As observed by the Supreme Court in the case of CIT v. Walfort Share and Stock Brokers P Ltd: 326 ITR 1 (SC), the insertion of section 14 A with retrospective effect reflects the serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the said act against the taxable income. The Supreme Court further observed as under:-