M/S. TATA INDUSTRIES LTD,MUMBAI vs. THE ITO 2(3)(3), MUMBAI

Per Sanjay Garg, Judicial Member: This appeal is preferred by the assessee against the order of Commissioner of Income Tax (Appeals)-XXX, Mumbai [hereinafter referred to as “the CIT (A)]” passed in appeal No.CIT (A) -XXX/IT-117/Rg.2 (3)/07-08 dated 06-05-2008 for assessment year 2004-05.

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3 ITA No.4894/Mum/2008 11. The CIT (A) erred in confirming that deduction under section 10A of the Act cannot be claimed by the Appellant for the purpose of computing Income from Business or Profession and that deduction under section 10A of the Act can only be claimed on the Gross Total Income of the Appellant.

The brief facts relating to the above grounds are that during the assessment proceedings, the AO noted the assessee was having activities of purchasing the share in group companies for the purpose of controlling interest and also promoted some of the companies for which assessee borrowed the funds and paid the interest. The assessee claimed the deduction of such interest u/s. 36(1) (iii) of the Income Tax Act. The AO further noted that the assessee’s balance sheet as on 31.03.2004 reflect total unsecured loan at Rs.1062.8 crore, while the investment made in various shares was at Rs.1727.83 crores. The profit and loss a/c. for F.Y 2003-04 reflect that assessee paid/claimed gross interest of about Rs.75.21 crores, while it had received dividend of Rs.6.16 crores which was claimed as exempt. The assessee also reflected receipt

4 ITA No.4894/Mum/2008 of interest of Rs.7.28 crores. The assessee in computation of total income had suo moto disallowed Rs.39 crores u/s. 14A of the Act. On enquiry from AO for the method and calculation of such amount, the assessee submitted that the working was based on proportionate disallowances of net interest of Rs.67.9 crores (75.21 -7.28) as proportion of loan fund to total fund.

5 ITA No.4894/Mum/2008 controlling interest in promoted companies by purchasing shares is allowable expenditure;(ii) Interest paid on borrowing for capital expenditure is allowable.;(iii) Interest expenses allowable even though assessee derived dividend income.

6 ITA No.4894/Mum/2008 received on the total value of investment of Rs.93.73 crores, while there was no dividend received on investment of Rs.1689 crores and therefore, interest disallowances should be restricted for the borrowed fund utilized for investment of Rs.93.73 crores. The AO thereafter held that the interest expenses were not allowable as per the provisions of sec.14A which states that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to the income which does not form part of the total income. The AO considered the provisions of sec.10(34) and sec.115-O of the Act and disallowed gross interest expenditure of Rs.75.21 crores u/s. 14A of the Act both for the normal provision as well as for book profit u/s. 115JB Explanation ‘f’. The AO further disallowed from the total expenditure of Head office of Rs.93.39 crores, an expenditure of Rs.1.32 crores being 7.57% (the dividend receipt of Rs.6.16 crores being 7.57% of total receipt of Rs.81.33 crores) after excluding the interest already disallowed from the total expenditure.

7 ITA No.4894/Mum/2008 8. We have heard the rival contentions of the Ld. Representatives of both the parties and have also gone through the record. The Ld. Counsel for the assessee, at the outset, has stated that the lower authorities have made disallowance u/s 14A only and no disallowance has been made under section 36(1)(iii) of the Act. He has further stated that the assessee is an investment & finance company and a promoter of new companies in hi-tech field. As a business activity, the assessee holds investment in the share capital of the companies promoted by it as controlling interest and therefore, takes active interest in the business of these companies. the assessee had made investments only in the wholly owned subsidiaries and in associated companies. That the entire investments were made for business purposes for having control over subsidiary and associated companies. He, therefore, has contended that the interest expenditure incurred by the assessee is otherwise allowable as business expenditure u/s 36(1) (iii) of the Act. In the context of disallowance under the provisions of section 14A, the Ld. AR relying upon the decision of the Hon’ble Delhi High Court in the case of ‘Joint Investment Private Limited vs.CIT’ reported in 372 ITR 694 and of the Hon’ble Punjab & Haryana High Court in the case of ‘PCIT vs. Empire Package Pvt. Ltd.’ [ITA No. 415 of 2015 date of decision 12.01.2016] has contended that disallowance u/s 14 A cannot exceed the exempt income earned during the year. He has further submitted that the law declared by the High Court of the other State, in the absence of any contrary decision of the Jurisdictional High Court is binding on the Tribunal. He has further relied upon various case laws to stress the point that even if the assessee under a mistake or misconception has over assessed itself in the return of income, the

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Tribunal can give relief to the assessee to the extent the assessee is over assessed and direct the lower authorities to tax the assessee as per the provisions of law. The ld. AR has also filed written submissions dated 21.6.2016 in support of the above contentions raised which for the sake of convenience are reproduced as under:- “DISALLOWANCE IS ONLY UNDER SECTION 14A 1. (i) The entire interest expenditure is disallowed by the Assessing Officer only under Section 14A. This is clearly established by paragraph 3.1 on page 2 of the Assessment Order wherein the Heading reads as follows: “3.1 Disallowance of interest on unsecured loan and Disallowance of expenses debited to the Profit & Loss Account in case of the Head Office under normal computation and u/s 115JB both under the provisions of Section 14A.”

(ii) On page 3 of the Assessment Order, the Assessing Officer, in relation to cases quoted by the Appellant, has observed as follows: “By virtue of Section 14A, such expenses are not allowable. It is seen that these decisions pertain to those assessment years when Section 14A was not inserted. Section 14A was inserted by the Finance Act, 2001 with retrospective effect from 01/04/1962. Also, most of the decisions quoted by the assessee in its support predate the said insertion of Section 14A. Without prejudice to the same, none of these decisions could consider the provisions of Section 14A.”

(iii) On page 7 of the Order, the above point is reiterated observing as follows: “Therefore, the principles of law laid down by the Apex Court in the above case stand superseded by the insertion of new provision in the form of Section 14A of the Act.”

(iv) More importantly, in pargraph 3.5 on page 10, it is observed as follows: “3.5 The crux of the findings is that the interest expenses are not allowable as per the provisions of Section 14A which states that for the purpose of computing the total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to the income which does not form part of the total income.” (v) The provisions of Section 14A are bodily lifted and reproduced in the Assessment Order at pages 3-4 and at page 11, since this was the provision which was interpreted and applied by the Assessing Officer.

(vi) The disallowance of other expenses is also made only under Section 14A in paragraph 4 at page 12, the Heading whereof reads as follows: “4. Apportionment and disallowance of other expenses

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in case of the activities of the HO vis-à-vis Section 14A for normal computation and u/s 115KJB.”

(vii) The disallowance is only under Section 14A is established conclusively and for this purpose reference is made to the computation of income in paragraph 14 at page 24, wherein the following additions are made in words quoted herein below

“i. Interest u/s 14A (per para 3) 75,20,81,011 ii. Other expenses u/s 14A (para 4) 1,31,97,494”

GROUND BEFORE CIT(A) AND HIS ORDER ARE ONLY ON SECTION 14A

2 (i) In view of the fact that the disallowance was made only under Section 14A, the Ground of Appeal preferred by the Appellant to the CIT (A) was also confined to Section 14A. This is clear from Ground 2 in the aforesaid Appeal which reads as under: “2.(a) The ITO erred in disallowing the entire interest expenditure of Rs.75,20,81,011/- under the provisions of Section 14A, for the purpose of computing income from Business or Profession and also in the computation of taxable income u/s. 115JB.” “2. (b) The ITO erred in disallowing establishment expenditure amounting to Rs.1,31,97,494/- in the same proportion as the Dividend Income bears to be the total receipts, for the purposes of computing income from Business or Profession and also in the computation of taxable income u/s 115JB.”

(ii) The CIT (A) in his order dated 06/05/2008 considered the above specific Ground 2(a) regarding Section 14A and gave his final adjudication in Para 8.1 at the end of page 12 in the following words “Under these facts and circumstances of the case the assessing officer is justified in disallowing the entire interest expenses claimed by the appellant under Section 14A of the Income-tax Act, 1961. Accordingly this ground is decided against the appellant.” With regard to th aforesaid Ground 2(b) he made similar observation in Para 10.1 at the end of page 16 by holding thus… “Therefore ….. the disallowance to be made on account of expenses relating to earning of exempt income under section 14A is upheld.”

GROUND BEFORE HON’BLE BOMBAY HIGH COURTBLE ITAT IS ONLY ON SECTION 14A.

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purpose of computing income from Business or Profession and also for computing the Adjusted Book Profit u/s 115JB of the Act.” “2. The CIT(A) erred in confirming the disallowance of establishment expenditure amounting to Rs.1,31,97,494/- under the provisions of Section 14A of the Act, in the same proportion as the Dividend Income bears to the total receipts, for the purpose of computing Income from Business or Profession and also for computing the Adjusted Book Profit u/s 115JB of the Act.”

Under the above Grounds, the entire disallowance under Section 14A is challenged in totality.

DIALLOWANCE UNDER SECTION 14A CANNOT EXCEED EXEMPT INCOME

a) Joint Investments Pvt. Ltd. vs. CIT – 372 ITR 694 (Del) b) PCIT vs. Empire Package – ITA No.415 of 2015 dt. 12/1/16 (P&H) Delhi High Court has unambiguously observed that the window for disallowance in Section 14A is only to the extent of expenditure incurred in relation to the tax exempt income. The Punjab & Haryana High Court dismissed the Departmental Appeal in the above case where the following question was raised by it. “Whether in the facts and circumstances of the case, the Hon’ble ITAT is justified in law to hold that the disallowance made under Section 14A read with Rule 8 D cannot exceed the exempt income, in the absence of any such restriction being there in the relevant section or rule?”

(ii) Mumbai Benches of the Hon’ble Tribunal as also others have taken the above view. Some of such Hon’ble Tribunal Orders are as follows:

a) Syntel Ltd. vs. JCIT (OSD) – ITA No.3413/N/2007 (ITAT Mumbai) b) Daga Global vs. ACIT – ITA No.5592/M/2012(ITAT Mumbai) c) Sahara India Ltd. vs. DCIT (2014) 148 ITD 336 (ITAT Delhi)

LAW DECLARED BY HIGH COURT IS BINDING ON TRIBUNAL IN ANOTHER STATE

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NO TAX WITHOUT AUTHORITY OF LAW – TRIBUNAL CAN GIVE RELIEF EVEN IF AMOUNT OFFERED TO TAX IN THE RETURN OF INCOME 6. Article 265 of the Constitution in unmistakable terms provides that no tax shall be levied or collected except by authority of law and therefore the Hon’ble Supreme Court has held that the purpose of assessment proceedings is to assess correctly the tax and consequently, the Tribunal has the power to grant relief if it is found that a non-taxable item is taxed or a permissible deduction is denied and thus an assessed income can b lesser than the returned income. Hence, in the present case, it is permissible for the Hon’ble Tribunal to confine the disallowance under Section 14A only to the exempt income of Rs.6.16 Crores notwithstanding the Appellant having offered a disallowance under Section 14A in its return of income of Rs.49 Crores which was calculated on the basis of the method adopted by the Department in the earlier years. In this connection, the following decisions may be noted: (i) NTPC vs. CIT – 229 ITR 383 (Supreme Court) In this case, the Supreme Court has held as follows: “The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item.” (ii) DCIT vs. Maruti Udyog Ltd. (101 TTJ 760) (Delhi Tribunal) In this case, the Delhi Bench of the Tribunal (Shri K. C. Singhal and Shri G. S. Pannu) applied the

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above decision of the Apex Court. The Tribunal entertained a question which had not been raised earlier at any stage. (iii) Birmala L. Mehta – 299 ITR 1 (Bombay High Court) In this case, the Bombay High Court observed as follows: “Article 265 of the Constitution of India unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law.” (iv) Balmukund Acharya – 310 ITR 310 (Bombay High Court) In this case, the Bombay High Court applied the above decision of Nirmala L. Mehta and at page 318 in paragraph 32 observed as follows: “Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconceptions or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected.” (v) CIT vs. “CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd.” (2012) 349 ITR 336 (Bom.) Brokers – 349 ITR 336 (Bombay High Court) The Bombay High Court in this case held that the Appellate authorities have jurisdiction to deal with grounds which become available on account of change of circumstances or law and thus, entertain a deduction which was not claimed in the return of income. (vi) Guharat Gas vs. JCIT – 245 ITR 84 (Gujarat High Court) In this case, the Gujarat High Court held that an assessed income can be less than the returned income under the provisions of the Income-tax Act and therefore a contrary CBDT Circular was not in accordance with law. (vii) Chandrashekhar Baharwani vs. ACIT (ITA Nos.7810/M/2010) (Mumbai Tribunal) In this case, the Mumbai Bench (Shri Sanjay Arora and Shri Sanjay Garg) followed the above decisions of the Bombay High Court and of the Gujarat High Court. The Tribunal granted a relief in respect of Capital Gains which were inadvertently included in the return. The Tribunal observed as

13 ITA No.4894/Mum/2008 follows: “Moreover, if the assessee is, otherwise, entitled to a claim of deduction but due to his ignorance or for some other reason could not claim the same in the return of income, but has raised his claim before the appellate authority, the appellate authority should have looked into the same. The assessee cannot be burdened with the taxes which he otherwise is not liable to pay under the law.”

14 ITA No.4894/Mum/2008 has further contended that this concept has to be understood and applied in reference to “Dividend” and “Income by way of dividend”. That ‘income by way of dividend’ which can be claimed as exempt u/s 10 (34) of the Act refers to the total dividends received minus the expenditure incurred in relation to the earning of such dividends. That the concept of income includes a loss i. e. negative income or zero i. e. nil income. That the expenditure incurred in relation to earning of exempt income whether such activity yields positive income, nil or negative income (loss) is to be disallowed u/s 14A of the Act. He has further relied upon the provisions of section 115-O (5) of the Act wherein it has been provided, “no deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub- section (1) or the tax thereon”. He, therefore, has contended that any expenditure relatable to dividend receipt is not allowable under any provision of the Act. He has further relied upon various case laws in support of his contentions. He has also filed written submissions in support of his contentions, the relevant part of which for the sake of convenience and ready reference is reproduced as under: “(3) Contentions of revenue

3.1 The provisions of section 14A only reiterate the settled law about Matching Principle of Accountancy i. e. that current income Vs. Current expenditure and in case exempt income – no expenditure to be allowed at all – whether direct or indirect – otherwise the matching principle gets disturbed.

(a) As per the basic principle of taxation the disallowance u/s. 14A is both direct and indirect expenditure and if an assessee claims that he has incurred no indirect expenditure- then as per mandate of Sec.14A(2) and 14A(3) – he will have to demonstrate the same before A.O. who will determine it in accordance with the provisions of sec.14A(2) and 14A(3) and record his dissatisfaction with

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assessee’s method of computation vis-a-vis the method of computation stated in sec.14A(3) r.w. Rule 8D.

(b) This will apply to both the “normal profit/statutory profit” and also to the “book profit” because both have to be computed in accordance with the matching principle of accountancy which requires disallowance of both direct and indirect expenditure in relation to the exempt income. Also, section 115JB (1)(f) uses the same expression.

3.2 (a) There is fundamental difference between the “Receipt” and “Income”. The concept of matching principle as explained and found to be central spine of accounting standard of recording various transactions for computation of income is based on this difference. This concept has to be understood and applied in reference to “Dividend” and “Income by way of dividend” which is used in various provisions of the Act both prior to insertion of section 14A of the Act or thereafter so to arrive at the correct import of the provision of section 14A, its interpretation and the objective and intent of the Hon’ble Legislature for promulgating these provision.

(b) The constitutional bench of Hon’ble Supreme Court ( Bench consisting of five Hon’ble judges) dealt with this issue in the case of Distributors ( Baroda )(P) Ltd V/s. Union of India (1985) 22 Taxman 49 through dealing with section 80M of the Act (omitted w. e. f. 01.04.2004 but related to dividends and deduction /relief out of receipt of dividend). Hon’ble Apex Court traced, considered and explained the history of introduction of such provisions related to dividend in this landmark judgement.

(c) The Hon’ble Constitutional bench of Supreme Court while dealing with the construction of sec. 80M of the Act, overturned, its earlier decision of 3 Member Bench in the case of Cloth Traders ( P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 and observed that

“To perpetuate an error is no heroism. To rectify it is the compulsion of judicial conscience. In this we derive comfort and strength from the wise and inspiring words of Justice Bronson in Pierce v. A.M.Y. Delameterat page 18:

"a Judge ought to be wise enough to know-that he is fallible and therefore ever ready to learn : great and honest enough to discard all mere pride of opinion and follow truth wherever it may lead : and courageous enough to acknowledge his errors."

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Hon’ble Apex Court at para 14 to 17 interpreted the sec.80M as follow: “We may, therefore, first examine the language of section 80M for arriving at its true interpretation. But before we do so, let us consider what is the object behind grant of relief under section 80M. It was common ground between the parties that the main object of the relief under section 80M is to avoid taxation once again in the hands of the receiving company of the amount which has already borne full tax in the hands of the paying company vide the written submission under the heading 'Object of relief on inter-corporate dividends' filed by the learned counsel on behalf of the assessee in the course of the arguments. Now when an amount by way of dividend is received by the assessee from the paying company, the full amount of such dividend would have suffered tax in the assessment of the paying company and it is obvious, that, in order to encourage inter-company investments, the Legislature intended that this amount should not bear tax once again in the hands of the assessee either in its entirety or to a specified extent. But the amount by way of dividend which would otherwise suffer tax in the hands of the assessee, would be the amount computed in accordance with the provisions of the Act and not the full amount received from the paying company. Therefore, it is reasonable to assume that in enacting section 80M, the Legislature intended to grant relief with reference to the amount of dividend computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received from the paying company. It is difficult to imagine any reason why the Legislature should have intended to give relief with reference to the full amount of dividend received from the paying company when that is not the amount which is liable to suffer tax once again in the hands of the assessee. The Legislature could certainly be attributed the intention to prevent double taxation but not to provide an additional benefit which would go beyond what is required for saving the amount of dividend from taxation once again in the hands of the assessee. Bearing in mind these prefatory observations in regard to the legislative object, we may now proceed to construe the language of section 80M.

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'Gross total income' is defined in section 80B(5) to mean 'total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or under section 80-O.' Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or in other words, forms part of the gross total income, the condition specified in the opening part of sub-section (1) of section 80M would be fulfilled and the provision enacted in that sub-section would be attracted. 16. Now it was urged on behalf of the assessee that the words 'where the gross total income of an assessee …….includes any income by way of dividends from a domestic company' in the opening part of sub- section (1) of section 80M refer only to the inclusion of the category of income and not to the quantum of such income and, therefore, the words 'such income by way of dividends' following upon the specification of this condition, cannot have reference to the quantum of the income included but must be held referable only to the category of the income included, that is, income by way of dividends from a domestic company. This was the same argument which found favour with the Court in Cloth Traders (P.) Ltd.'s case (supra) ,but on fuller consideration, we do not think it is well founded. We may assume with the Court in Cloth Traders (P.) Ltd.'s case (supra)that the words 'where the gross total income of an assessee……..includes any income by way of dividends from a domestic company' are intended only to provide that a particular category of income, namely, income by way of dividends from a domestic company should form a component part of gross total income, irrespective of what is the quantum of the income so included but it is difficult to see how the factor of quantum can altogether be excluded when we talk of any category of income included in gross total income. What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. Therefore, the words 'such income by way of dividends' must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. It is obvious, as a matter of plain grammar, that the words 'such income by way of dividends' must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. Consequently, in order to determine what is 'such income by way of dividends', we have to ask the question : what is the income by way of dividends from a domestic company included the gross total income and that would obviously be the income by way of dividends computed in accordance with the provisions of the Act. It is difficult to appreciate how, when we are interpreting the words 'such income by way of dividends', we

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can make a dichotomy between the category of income by way of dividends included in the gross total income and the quantum of the income by way of dividends so included. This Court observed in Cloth Traders ( P.) Ltd.'s case (supra) that the words 'such income by way of dividends' as a matter of plain grammar must be substituted by the words 'income by way of dividends from a domestic company' in order to arrive at a proper construction of the section, but there is a clear fallacy in this observation, because in making the substitution it stops short of the words 'income by way of dividends from a domestic company' and does not go to the full length to which plain grammar must dictate us to go, namely 'income by way of dividends from a domestic Company included in the gross total income', [emphasis supplied] otherwise, we would not be giving to the word 'such its full meaning and effect. The word 'such' in the context in which it occurs can only mean that income by way of dividends from a domestic company which is included in the gross total income and that must necessarily be income by way of dividends computed in accordance with the provisions of the Act. 17.There is also one other strong indication in the language of sub- section (1) of section 80M which clearly compels us to take the view that the deduction envisaged by that provision is required to be made with reference to the income by way of dividends computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received by the assessee. This indication was also unfortunately lost sight of by the Supreme Court in Cloth Traders ( P.) Ltd.'s case (supra) presumably because it was not brought to the attention of the Supreme Court. The Supreme Court observed in Cloth Traders (P.) Ltd.'s case (supra )that the whole of the income by way of dividends from a domestic company or 60 per cent of such income, as the case may be, would be deductible from the gross total income for arriving at the total income of the assessee. We are afraid this observation appears to have been made under some misapprehension, because what sub-section (1) of section 80M requires is that the deduction of the whole or a specified percentage must be made from 'such income by way of dividends' and not from the gross total income. Sub-section (1) of section 80M provides that in computing the total income of the assessee there shall be allowed a deduction from 'such income by way of dividends' of an amount equal to the whole or a specified percentage of such income. Now when in computing the total income of the assessee, a deduction has to be made from 'such income by way of dividends', it is elementary that 'such income by way of dividends' from which deduction has to be made must be part of the gross total income. It is difficult to see how the language of this part of sub-section (1) of section 80M can possibly fit in if 'such income by way of dividends' were interpreted to mean the full amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income: what would be included would only be the amount of dividend as computed in accordance with the provisions of

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the Act. If that be so, it is difficult to appreciate how far the purpose of computing the total income from the gross total income any deduction should be required to be made from the full amount of the dividend. The deduction required to be made for computing the total income from the gross total income can only be from the amount of dividend computed in accordance with the provisions of the Act which would be forming part of the gross total income. It is, therefore, clear that whatever might have been the interpretation placed on clause (iv) of sub-section (1) of section 99 and section 85A, the correctness of which is not in issue before us, so far as sub-section (1) of section 80M is concerned, the deduction required to be allowed under that provision is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee.”

d) Hon’ble Supreme Court in the case of ACG Associated Capsules (P.) Ltd. [(2012) 343 ITR 89] followed the ratio of Hon’ble constitution Bench of Supreme Court in the case of Distributors (Baroda)(P) Ltd [(1985) 155 ITR 120] while adjudicating the issue of netting of interest for consideration u/s. 80HHC of the Act. Hon’ble Supreme Court distinguished Hon’ble Bombay High Court decision in the case of CIT V/s. Asian Star Co. Ltd. (2010) 326 ITR 56 and overruled CIT V/s. Kalpataru Colours and Chemicals (2010) 192 Taxaman 435. At para 11 of that order Hon’ble Apex Court considered the difference between income and receipt following the ratio of Distributors (Baroda) Pvt. Ltd. (Supra). It is important to note here that one of the grounds of appellant is related to netting of interest for consideration of disallowances. The following ratio as per para 12 of Hon’ble Supreme Court order in the case of ACG Associated Capsules Pvt. Ltd. is to be applied.

“12. If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under Section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as an expense in accordance with Sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 80HHC. In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head "Profits and Gains of Business or Profession", is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business.”

3.3. It is in view of such interpretation clearly distinguishing the difference of “dividends receipts” and “Income by way of dividends” one

20 ITA No.4894/Mum/2008 has to consider following provisions of the Act as how the same is applicable for sec.14A of the Act.

(i) Section 2(22) of the Act define “dividend” as inclusive definition being distribution of accumulated profits in cash or kind. (ii) Section 4 of the Act is the charge of income tax on “Total income”. (iii) The section 2(45) of the Act provide an exhaustive definition of “total income” as “Total amount of income referred to in sec.5, computed in the manner laid down in this Act.” (iv) Sec.5 of the Act defines the scope of “Total income”. (v) Sec.8 of the Act though has heading as “dividend income” but the same is to categorize the time when such dividend (both final or interim) is to be included in total income. (vi) Sec.10 (34) is the section for consideration which can be broken as follows for understanding. • Any income • By way of dividend • Referred to in sec.115-O (vii) Sec.10(34A), 10(35), 10(35A), 10(36), 10(37) and 10(38) of the Act are similarly worded with phrase “any income by way of” . This is because Chapter III of the Act has the heading “Income which do not form part of total income”.

It is therefore, first we have to compute the income following the matching principle which says receipt minus expenditure/outgoing before taking a decision whether such income is excludable or not forming part of “Total income” (viii) Section 14 of the Act under Chapter IV with the title “Computation of total income” provides various heads of income. The section can be understood by breaking it as follows • Save as otherwise provided by the Act. • All income • Shall • For the purpose of • Charge of Income Tax and computation of Total income • Be classified • Under following heads of income

The phrase “save as otherwise provided” is the safe guard for inclusion of income under deeming provision as provided in the Chapter VI of the Act with the title “aggregation of income” and “set off and carry forward of loss”. The distinction of Sec.66 for inclusion of income as provided under Chapter VII though there is no income tax payable is to separate out such income from the Chapter III of the Act. However,

21 ITA No.4894/Mum/2008 sec.68, 69, 69A, 69B, 69C, 69D of the Act are deemed income where entire sum is treated as income without following /applying matching principle

(ix) Sec. 14A though included in the Chapter IV of the Act i.e computation of total income but it is having heading as “expenditure incurred in relation to income not includable in total income”. It is therefore to understand the heading it can be broken as follows : • Expenditure incurred • In relation to • Income • Not includable in • Total income

It is therefore, the income which is not to be included in total income is the income computed under various head following matching principle under the Chapter III of the Act.

(x) Sec. 14A (1) of the Act which was brought retrospectively, by the Finance Act 2001 can be understood by breaking the provision as follows: • For the purpose of • computing • the total income • under this chapter(i.e under various head) • No deduction • shall be allowed • in respect of • expenditure incurred • by the assessee • in relation to • “income” • which does not from • part of the total income under this Act. The provisions, therefore, clearly envisaged that following the matching principle for various receipts from various resources an assessee has to compute income under various head. It is after computation of income under various heads, the income which does not form part of total income has to be identified and the expenditure considered for computing such exempt income is required to be disallowed u/s. 14A of the Act. As per settled law the concept of income includes a loss i. e. negative income or zero i. e. nil income. As per matching principle, there can be positive receipt resulting into positive income or loss or nil income. Similarly, from a source there can be nil receipt which may result into loss i. e. negative income or nil income. There can be a receipt (sec.66 r. w. Chapter VII) the income resulting there from though includable but no income tax is charged resulting into non application of sec.14A of the Act. There can be dividend which is not referable u/s. 115-O of

22 ITA No.4894/Mum/2008

the Act i.e on which no dividend distribution tax (DDT) is paid and therefore, for receipt of such dividend, income under the head “income from other source” is required to be computed where expenditure related to such dividend are admissible if eligible u/s. 57 (iii) of the I.T. Act. The basic intention and purpose of introducing sec.14A of the Act was to enlarge the scope of the apportionment of various expenditure irrespective of the fact whether the business or activities of an assessee is divisible or indivisible. Such intention and object of Hon’ble Legislature cannot be disregarded delving into consideration of receipt of dividend rather than considering income from dividend. The scope for prohibiting the dual benefit which were permissible prior to insertion of 14A of the Act by not only claiming exempt income on one hand and by reducing taxable income with the claim of expenditure relatable to exempt income on other hand is required to be considered. The prohibition u/s. 115-O (5) of the Act is unambiguous and clear with following words “no deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax thereon”. It is therefore, any expenditure relatable to dividend receipt is not allowable under any provision of the Act. There can be “Nil” dividend from any investment resulting into negative or Nil income by way of dividends u/s. 10(34) of the Act required no allowability of such expenditure if there.

3.4. Legal proposition a) The Hon’ble Supreme Court in the case of CIT Vs. Walfort Share & Stock Brokers 326 ITR 1 (SC) observed that the insertion of sec.14A with retrospective effect reflects the serious attempt on the part of the 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 Act against the taxable income. The Supreme Court also clearly held that in the case of an income like dividend income which does not form part of the total income, any expenditure/deduction relatable to such (exempt or non- taxable) income, even if it is of the nature specified in sec.15 to 59 cannot be allowed against any other income which is includable in the total income.

Hon’ble Supreme observed that basic principle of taxation is to tax the net income, i.e gross income minus the expenditure and on the same analogy the exemption is also in respect of net income. In other words, where the gross income would not form part of total income, its associated or related expenditure would also not be permitted to be debited against other taxable income. The Supreme Court made it very clear that the permissible deduction enumerated in sec.15 to 59 are now to be allowed only with reference to income which is brought under one of the heads of income and is chargeable to tax.

23 ITA No.4894/Mum/2008

[Note: The above observation and ratio were duly considered by Hon’ble Delhi High Court in the case of Maxopp Investment Ltd V/s.CIT – (2011) 15 Taxmann.com 390 (Delhi)].

b) The AO relied on the decision of Hon’ble ITAT Delhi in the case of Everplus Securities &Finance Ltd (101 ITD 151) wherein relying on the observation particularly in respect of clause 5 of sec.115-O (para 5.15 of the Hon’ble ITAT order), the Hon’ble ITAT considered Hon’ble ITAT Kolkata Bench order in the case of S.G.InvestmentInds. Ltd. Hon’ble ITAT Kolkatta observed following important observations in respect of section 10(33) (as now 10(34)) and sec.115-O of the Act.

(i) The section 115-O(1) beginning with the expression ‘notwithstanding anything contained in any other provisions of this Act’ is to give the provisions of section 115-O(1) in case of conflict, an overriding effect over any other provisions of the IT Act, 1961. It is thus clear that section 115-O(1) is a specific provision overriding in case of conflict, the general provisions. The sub-section (5) of section 115-O has made it clear that no deduction under any other provisions of Income-tax Act shall be allowed to the company or a shareholder in respect of dividend income which has been charged to tax under section 115-O(1) or the tax thereon. Thus, this sub- section has restricted the allowability of all deductions, which may otherwise be allowable under any other provisions of the Act, against dividend income. It means that the interest paid for borrowings used for purpose of acquiring shares which has resulted in earning of dividend, and all other expenses in relating to the earning of dividend income will not be allowed as deduction under any other provisions of the Income-tax Act.

(ii) Regarding the claim for deduction of interest paid on monies borrowed for purchase of shares held as investment, we may observe that before insertion of sections 10(33) and 115-O of the Act, the deduction for interest paid on monies borrowed for acquiring the shares held as investments could have been normally claimed under section 57(iii) of the Act against dividend income. It cannot be claimed so now due to the explicit provisions of sub- section (5) of section 115-O read with section 14A of the Act inasmuch as such dividend income does not form part of total income chargeable to tax."

(iii) It is now immaterial whether the shares are held as stock-in- trade or investment portfolio as an integral part of the business or held as investment as such from the point of allowability of

24 ITA No.4894/Mum/2008

deduction for expenditure incurred in relation to dividend income which do not form part of the total income by virtue of section 10(33) of the Act. It was further observed that now the situation is clarified as a result of insertion of section 14A and the decisions of various courts not allowing the apportionment of interest against dividend income are of no help to the assessee. The purpose of inserting section 14A is to nullify the decision, in Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 4501. (SC) to the extent it relates to the cases of indivisible business.

(iv) The Appellate Tribunal also observed that it is common knowledge that no dividend could be earned without making investment as the dividend could have been earned only after investments are made. When it is found that the investments in shares are made out of borrowed capital, it is then not understood as to why interest paid on such borrowings should not be regarded as expenditure incurred in relation to earning of dividend income. The amount of such interest is, therefore, required to be deducted from the dividend income before computing the amount of dividend on which the exemption under section 10(33) is to be allowed. c) Hon’ble ITAT Mumbai in the case of Kankhal Investment & Trading Co. P. Ltd. V/s. ACIT – (2009) 116 ITD 492 (Mum) dealt with similar facts.

(i) Hon’ble ITAT in this order at para 8 & 9 considered following facts;

“8. In the course of hearing, a query was raised from the Bench as to how the deduction could be allowed under the head ‘Profits & Gains from Business/Profession’ particularly when neither of the receipts from such business was assessable under such head. It was clarified to him that in the business of holding of investments in shares, the receipts were either by way of dividends or sale proceeds of shares. Both the receipts were not assessable under the head ‘Profits & Gains from Business/Profession’ but were assessable either under the head ‘Income from other sources’ or under the head ‘Capital Gains’. Thus, computation of income under the head ‘Profits & gains of business or profession’ did not arise.

25 ITA No.4894/Mum/2008

Proceeding further, it was submitted that the assessee had other incomes like interest on debentures and interest on loans and, therefore, such deduction could be allowed against such receipts.”

(ii) The revenue relied on Hon’ble Supreme Court judgement in the case of Bengal Assam Investors Ltd., Rajendra Prasad Modi, Hon’ble ITAT Delhi decision in the case of Everplus Securities & Finance Ltd. and also Hon’ble Mumbai ITAT order in the case of Kamu Metals Pvt. (ITA No.7211/M/2003) for contending that “no deduction under sections 30 to 43D can be allowed as the receipts are chargeable to tax either under the head ‘Capital Gains’ or under the head ‘Income from Other Sources’. Proceeding further, it was submitted that even assuming that the assessee was in the business of holding of investment then dividend income arising from such business is exempt under section 10(33) of the Act and, therefore, expenditure related to such income cannot be allowed under section 14A of the Act.”

(iii) Hon’ble ITAT considered Hon’ble Apex Court Judgements in the case of Distributors (Baroda) Pvt. Ltd. 83 ITR 377 and Bengal and Assam Investors Ltd., NarainSwadeshi Weaving Mills 26 ITR 765 and Amalgamation Pvt. Ltd 226 ITR 188 at para 19 and 20 held that

“19. In view of the above legal position, we are of the view that where a specific head is provided in respect of a particular income, then such income must be computed under that very head irrespective of the nature of income. In the case of a company in the business of holding shares, if investment in shares is disposed off then income therefrom has to be computed only under the specific head ‘Capital Gains’ and this legal position is not even disputed by the assessee’s counsel and the assessee itself has also declared the income under the head ‘Capital Gains’. Further dividend income is also to be computed under the specific head ‘Income from other Sources’ if such income is taxable. Since dividend income is exempt under section 10(33) of the Act, the question of computing such income does not arise. There is no other receipt arising or accruing to the assessee from the business of holding investment in shares. Therefore, the entire receipts from such business has to be excluded from the head ‘Profits and gains from business or profession’ since such receipts falls under the specific heads. Income can be computed only after allowing deductions as provided under the head under which income is to be computed. No other deduction is permissible except provided under that head. The interest paid on the borrowed funds, at the most, could be allowed against the dividend income if

26 ITA No.4894/Mum/2008

investment is made to earn the dividend income. The contention of the assessee is that investment was not made to earn dividend income. Therefore, such deduction could not be allowed even against the dividend income. Even otherwise, such income being exempt the question of deduction against dividend income becomes academic. The interest paid as per the contention of the ld. counsel for the assessee, could relate to the profits arising from sale of investments since the main object was to hold the investments. Since income arising from sale of investment has to be computed under the head ‘Capital Gains’, the deduction has to be allowed only in accordance with the provisions specified under the head ‘Capital Gains’. The Legislature was aware of the aspect of inflation of price and, therefore, it made provisions to determine the indexed cost of acquisition, which would take care of interest cost also. No separate deduction is allowable under this head in respect of interest paid on borrowed funds. Thus, in our opinion, no deduction is allowable to the assessee in respect of interest paid on borrowed funds.”

27 ITA No.4894/Mum/2008

respect of which expenditure are incurred, are considered under other heads, then question of determining any income under the head ‘Profits or gains from business or profession’ does not arise. Hence, the contention of the assessee is rejected”.

d) A larger bench of Hon’ble supreme court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd ( 1997 ) 227 ITR 172 considered the issue of computation of income under various heads.

e) Hon’ble HIGH COURT OF MYSORE in the case of United Breweries ([1973] 89 ITR 17) held

“It is well-settled that the mere fact that a man holds all the shares in a company does not make the business carried on by that company his business, nor does it make the company his agents for the carrying on of the business. That proposition is just as true if the shareholder is itself a limited company. It is also well-settled that there may be such an arrangement between the shareholders and a company as will constitute the company the shareholders’ agent for the purpose of carrying on the business and make the business the business of the shareholders. It is, therefore, a question of fact in each case to be decided whether the subsidiary was carrying on the business as the company’s business or as its own. The business of a subsidiary company can be regarded as the business of the parent-company if in addition to the capitalist control; it has ‘functional control’ over its subsidiary.” In the case of appellant, the question of business carried on by the group companies with that of appellant’s own business is required to be considered if the claim of interest is to be allowed u/s 36 (1) (iii) of the act with total disrespect to the provisions of section 14 A of the act read with provision of section 115-O of the act. It is important to bear into consideration that this case was prior to Insertion of section 14 A of the act but the ratio is still relevant in view of provisions so brought in.

f) ITAT Mumbai A bench in the case of PANATONE FINVEST LTD (ITA No 7324/Mum/2005 )wide order dated 5-10-09 considered the issue of allowability of interest of this subsidiary of TATA Sons Limited for the purchase of Shares from borrowed fund not for the trading but to obtain controlling interest for the TATA group. Hon’ble ITAT rejected the claim of the interest u/s 57 (iii) of the act considering the fact that the assessee withdrawn its claim deduction u/s 36 (1) (iii) and also that the intention of making investment for acquiring controlling interest was even not to earn any receipt taxable under the head INCOME FROM OTHER SOURCES hence no deduction u/s 57 (iii) of the act. Ratio of Hon’ble Bombay High Court in the case of AMRITABEN R SHAH was followed.

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g) Hon’ble ITAT Mumbai D bench in the case of GANJAM TRADING CO PVT LTD ( ITA NO 3724/ MUM/2005) wide order dated 28-6-2012 dealt with section 14 A as well as 36 (1) (iii) of the act. At para 4.4 of that order Hon’ble ITAT held that the assessee had been making only long term strategic investment in group companies the income from which either in the form of long term capital gain or in the form of dividend is exempt from tax. Therefore, the expenditure incurred in relation to such investment is required to be disallowed under section 14 A of the act. However, interest relating to the borrowings used in the purchase of trading shares from which dividend had been received is required to be excluded from such disallowance.

In reference to allowability of interest, Hon’ble ITAT at para 5.5 held that

“We have carefully considered the various aspects of the matter. The ld. AR for the assessee has argued that trading and investment in shares was business of the assessee and therefore, the borrowed funds used for making advances for acquisition of shares have to be considered as used for the purpose of business and no disallowance should be made. We are unable to accept the contentions raised. The assessee had advanced money for purchase of shares of the group companies for the purpose of acquiring controlling interest and for the acquisition of other companies for the group. The acquisition of controlling interest in companies was not the business of the assessee as the assessee had not acquired controlling interest in any company with a view to managing the same. The assessee is an investment arm of the Zee group who has the management control over the companies. Advancing money interest free is also not the business of the assessee. Therefore, acquiring shares in the group companies for maintaining the controlling interest does not promote the business of the assessee and is only helpful to the group for having the management control over the companies. The ld. AR has relied on the judgment of the Hon'ble Supreme Court in the case of S.A. Builders (288 ITR 01) to argue that advances had been made on commercial expediency and therefore interest on borrowings should be allowed. It has not been shown to us as to how business of those companies promotes the business interests of the assessee so that interest free advances to them could be justified on commercial expediency. Reliance has also been placed on the judgment of the Hon'ble Supreme Court in the case of Core Health Care Ltd. (298 ITR 194) (supra), in which it has been held that once the capital has been borrowed for the purpose of business, interest has to be allowed irrespective of the fact whether the borrowed fund has been used for acquisition of capital assets or for revenue assets. The said judgment is not applicable as advancing interest free fund to the group companies is not the business of the assessee. The judgment of the Hon'ble High Court of Bombay in the case of CIT vs. Phil corporation Ltd. (4 CTR 226) (supra), is also not applicable as in that case there

29 ITA No.4894/Mum/2008

was no dispute that the amount had been paid to the sister concern as an integral part of business, which is not so in the present case.

5.6 Therefore, the interest expenses incurred by the assessee towards such interest free advances made for share application in group companies or for acquisition of other companies from the group has to be considered for disallowance”.

h) The Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. V/s. DCIT 328 ITR 81, adjudicated following substantial question of law. “(A)Whether on the facts and in the circumstances of the case, the • Tribunal ought to have held that as the limited issue raised by respondent No. 1 in the assessment order was as to the quantum of the exemption under section 10(33) that was available and not to disallow any part of the expenditure claimed, hence it was not open to the revenue to expand the scope of appeal by invoking the provisions of section 14A of the Act to disallow the expenditure incurred; (B)Whether on the facts and in the circumstances of the case, the • Tribunal ought to have held that no disallowance could be made under section 14A of the Act and hence erred in setting aside the issue relating to calculation of disallowance under section 14A of the Act to respondent No. 1; (C)Whether the Tribunal erred in directing respondent No. 1 to apply • rule 8D of the Rules for computing the amount of disallowance under section 14A of the Act.” The assessee has, in addition, filed a Petition under Article 226 of the • Constitution in order to challenge the constitutional validity of the provisions of section 14A and of rule 8D

Hon’ble Jurisdictional High Court held that

“Section 14A ensures that the shareholder, whose income from dividend is not included in the total income of a previous year, shall not claim a deduction in respect of the expenditure incurred in relation to earning such income. Section 14A is founded on a valid rationale that the basic principle of taxation is to tax net income, that is to say, gross income minus the expenditure. On that analogy as the Supreme Court observed in Walfort Share & Stock Brokers (P.) Ltd.’s case (supra), the exemption is also in respect of net income and expenses allowed can only be in relation to the earning of taxable income. Therefore, it cannot be said that an absurdity

30 ITA No.4894/Mum/2008

would result on the application of the literal interpretation of section 14A [Para 45]”.

The CBDT vide circular no.5/2013 dt.11.02.14 through a i) clarification in respect of disallowance of expenses under Rule 14 A of the Act clarified as follows:

“SECTION 14A OF THE INCOME-TAX ACT, 1961, READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 - EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME - CLARIFICATION ON DISALLOWANCE OF EXPENSES UNDER SECTION 14A IN CASES WHERE CORRESPONDING EXEMPT INCOME HAS NOT BEEN EARNED DURING THE FINANCIAL YEAR

CIRCULAR NO.5/2014 [F.NO.225/182/2013-ITA.II], DATED 11-2-2014

Section 14A of the Income-tax Act, 1961 ['Act'] provides for disallowance of expenditure in relation to income not "includible" in total income.

"Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income".

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Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective 6f the fact whether any such income has been earned during the financial year or not.

"(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt of amount computed in accordance with the following formula, namely:—

A/B/C

Where …..

B=the average of value of investment, 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;"

(iii) an amount equal to one-half percent of the average of the value of investment, 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."

(Emphasis added)

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The ratio of the above judgements emphasises that for computation of income one has to follow the scheme under various heads given u/s 14 of the act. Out of the total receipts from various sources one has to categorize the head under which such receipt will fall and for computing the income under that head the expenditure / allowance / deduction required to be reduced, if allowable under such head. There can be nil receipt from a source during previous year but nature of such receipt accrues or arises earlier or in later years will determine the head under which income has to be computed. The shift of nature of receipt i.e. investment converted into stock in trade, has to be limited for shifting of head from that year only.

It is therefore difference between receipt and income is to be considered with the scheme of various heads. There is difference between receipt of dividend and income from dividend. Similarly it is the income which does not form part of total income which is required to be considered u/s 14 A of the IT Act. In sec 10(34) of the act it is income by way of dividend and not the receipt of dividend which is exempted. Further such income by way of dividend is referred to the provision of section 115-O of the act i e not all the income by way of dividend is exempt sec 115-O (1) of the IT Act deals with the additional income tax chargeable on domestic company on any amount declared, distributed, or paid by such company by way of dividend. For domestic company this is in the form of appropriation while the same is receipt in the hands of shareholder. Sec 115-O (5) of the act restrict any deduction under any other provision of the act to be allowed to shareholder in respect of such dividend receipt. It is therefore for computing income by way of dividend from the dividend receipt so to claim exempt u/s 10(34) of the act, no expenditure can be allowed under any provision.

With due regards to ratio of various case laws relied on by appellant, such proposition were never considered by the respective court or Hon’ble ITAT and therefore the ratios are distinguishable on this issue. As per judicial hierarchy, ratio of Hon’ble Supreme Court which is not considered by Hon’ble High Courts and Tribunals (as relied on by appellant) required to distinguish. The ratio of Jurisdictional High Court in the case of Godrej & Boyce Manufacturing Co. is binding. The ratio of various cases relied on by appellant are of other Hon’ble Courts and Tribunals but no such ratios are laid down by Hon’ble Jurisdictional High Court or Hon’ble ITAT, Mumbai. Rather the ratios of Hon’ble ITAT are in favour of revenue preposition.

(4) The ld. CIT(A) order dt. 02.05.2008

a) At para 8 page 10,Ld.CIT(A) considered following undisputed facts

i. total loan fund of Rs.1062.8 crs.

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ii. Interest paid on borrowed capital and claimed in P&L A/c. is Rs.75.20 crs.

iii. Investment as per the balance sheet as on 31.03.2004 is of Rs.1727.82 crs.

iv Dividend receipt is of Rs.6.16 crs.

v. The assessee in its computation of income (annexure B at Sr.32 of appellant’s paper book) suo-moto disallowed expenditure for earning dividends at Rs.39 crs.

vi. The assessee admitted that interest paid on money borrowed for the purchase of share in group concern/companies for the purpose of controlling interest and claim the same deductable u/s. 36(1)(iii) of the Act, hence direct nexus is there between borrowed fund and investment.

vii. Before the assessing officer, the assessee claimed that interest paid for business activity of controlling interest in the group companies by purchase of shares hence the same is allowable u/s.36(1)(iii).

viii. The assessee place reliance on various case laws which were prior to the insertion of sec.14A of the Act. All these cases were distinguished by the assessing officer.

ix. The AO placed reliance on the case of Everplus Securities & Finance Ltd. V/s. DCIT 101 ITD 15 (Delhi) and its ratio was considered as applicable in the case of assessee considering the similarity in the facts of the case b) The Ld. CIT (A) at para 8.1 page 12 held that

i. The AO has established the nexus of entire borrowed funds having been investment in the shares against which exempted dividend income was earned.

ii. It is not that the appellant is either engaged in the trading of shares also. iii Therefore, there is no requirement of calculating the interest attributable to earning of dividend or business or any other income.

iv. The entire interest expenditure having been relatable to earning of dividend income which is exempt u/s. 10(34) of the I.T. Act, 1961, the action of the AO in disallowing the same is justified.

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v. Ratio of Hon’ble ITAT order in the case of M/s. Everplus Securities and Finance Ltd. (SUPRA) is squarely applicable in the facts and circumstances of the assessee’s case. vi. Even the claim of the appellant that net interest expenditure of Rs. 67.93 crs. Claimed as allowable u/s. 36(1)(iii) should be allowed is also baseless. The assessee has not claimed such netting either in its return of income or during its assessment proceedings before the AO . c) In reference to disallowance to administrative expenditure, ld.CIT(A) at para 9 page 13 considered (in brief) following facts and submission of the assessee.

i. Disallowances are on the basis of conjecture and surmises. ii. Ho’nble ITAT Delhi bench ratio in the case of Vimco Seedling Ltd. V/s. DCIT 100 ITD 267 is applicable which permits the disallowances for expenditure which has direct nexus approximate in relation to the earning of tax free income. iii. The amendment brought to sec,14A by the Finance Act 2006 w.e.f 1.4.2007 conferred such disallowances for the first time from 1.4.2007. iv. The ratio of ITAT Cochin in the case of Dhanlaxmi Bank Ltd. V/s. ACIT -12 SOT 625 does not permit such disallowances in the absence of any method which was subsequently provided by sec.40A (2) of the Act. v. The assessee vide its letter dt.18.2.2008 submitted before the LD.CIT(A) about complete detail of head office expenditure of Rs.93.39 crs. expendituresuo-moto disallowed by the assessee in the return of income by Rs.5.67 crs. (excluding Rs.39 crs) and disallowances of expenses made by the AO in the impugned assessment order of Rs. 0.74 crs. (disallowance of balance interest of Rs.36.21 crs excluded )for the contention disallowance can be considered on an amount of Rs.10.26 crs. at the rate of 7.57 % i.e disallowance of Rs.7768850/- instead of Rs.13197494/.

d) The Ld. CIT(A) at para 10 page 15 held that

i. The appellant has merely contended that the disallowance purely on conjectures and surmises without establishes any nexus between the expenditure and head office and the tax free income cannot be made and sustained. However, the appellant has not denied that parts of these expenses are also related to the investment. ii. In reference to reliance on Vimco Seedling Ltd., the amendment brought in the sec.14A by Finance Act, 2006, the issue was examined by the Hon’ble ITAT Mumbai in the case of ACIT v/s. Citicorp Finance Ltd. 108 ITD 457 which mandates that term expenditure occurring in sec.14A take in its sweep not only direct expenditure but also all forms of expenditure regardless whether they are fixed, variable, direct, indirect,

35 ITA No.4894/Mum/2008 administrative, managerial or financial expenditure. The Ld. CIT(A) supported this by referring to Hon’ble ITAT , Mumbai H Bench order dt.30.10.2006 in the case of Marezban Bharucha. Other such cases were also relied on to hold that such disallowances are justified even in the case where common fund accounting system is maintained.” 10. We have considered the rival contentions. So far as the issue of allowance or disallowance of interest expenditure u/s 36(1) (iii) in relation to the strategic investments in group Companies is concerned, admittedly, the lower authorities have made no addition on account of any disallowance under section 36(1)(iii) of the Act. However in the body of the order of the AO as well of the impugned order of the Ld. CIT(A), discussion has been made regarding the non-admissibility of claim of deduction of the interest expenditure even u/s 36(1)(iii) of the Act. Reliance has also been placed by the AO in this respect on the certain decisions of the Tribunal more particularly in the case of “Everplus Securities &Finance Ltd” (101 ITD 151) (supra). Though, no addition has been by the AO on account of disallowance of interest expenditure even u/s 36(1)(iii), yet this issue being discussed by the lower authorities, for the sake of completeness, we deem it fit to adjudicate this issue also so that no issue may be left unaddressed.

36 ITA No.4894/Mum/2008 interest in the business of these companies. The assessee had made investments only in the wholly owned subsidiaries and in associated companies. That the entire investments were made for business purposes for having control over subsidiary and associated companies the undisputed facts are that the assessee is an investment & finance company and a promoter of new companies in hi-tech field. As a business activity, the assessee holds investment in the share capital of the companies promoted by it as controlling interest and therefore, takes active interest in the business of these companies. The entire investments were made for business purposes for having control over subsidiary and associated companies.

37 ITA No.4894/Mum/2008 Tribunal in the case of Kankhal Investment & Trading Co. P. Ltd. V/s. ACIT – (2009) 116 ITD 492 (Mum) to contend that where a specific head is provided in respect of a particular income, then such income must be computed under that very head irrespective of the nature of income and that the deduction could be allowed under the head ‘Profits & Gains from Business/Profession’ particularly when neither of the receipts from business of holding of investments in shares, either by way of dividends or sale proceeds of shares were not assessable under the head ‘Profits & Gains from Business/Profession’ but were assessable either under the head ‘Income from other sources’ or under the head ‘Capital Gains’. However, we find that the above contentions have been duly discussed by the Hon’ble Delhi High Court in the case of “Eicher Goodearth Ltd. vs. CIT” has discussed the above issue and has held as under: “The judgments in Cocanada Radhaswami Bank (supra) and United Commercial Bank (supra) and the subsequent judgments in Western States Trading (P) Ltd. v. CIT [1971] 80 ITR 21 (SC) and Brooke Bond & Co. Ltd. v. CIT [1986] 162 ITR 373/28 Taxman 426E (SC) are authorities that the heads of income enumerated in the Income Tax Act in Section 14 do not denote their essential characteristics. In other words that a business or an individual receives some amount which may be assessed as income of a particular kind would not be conclusively determinative of that character. In the facts of the present case, that principle, in the opinion of the Court, would squarely apply. If indeed the assessee had invested and subscribed to the rights issue in order to retain the control it originally did in Eicher Tractors Ltd, it can still be said that the expenditure was towards promotion of business and, therefore, properly entitled to be treated as such under Section 36 (1) (iii). At the same time, we are also of the opinion that there has been inadequate consideration and discussion on this aspect before the lower authorities, particularly the AO and the CIT (A). As has been pointed out on behalf of the Revenue, at that stage, the parties were more concerned with whether net or gross expenditure had to be deducted under Section 80M. At the same time, the assessee, we notice did put his contention both to the CIT (A) and ITAT.

38 ITA No.4894/Mum/2008 10. This Court, therefore, is of the opinion that the law as declared by the Supreme Court in such cases is that if the expenditure is incurred for the purpose of promotion of business- more specifically as in the facts of this case to retain control or as part of a strategic investment of the assessee/company, such expenses - by way of interest outgo would have to be treated under Section 36 (1) (iii) and not under Section 57. The matter is, therefore, remitted to the AO for full appraisal of the fact situation and findings in the light of our conclusions. If, as a result of the AO's determination, it is found that such expenditure is incurred, the net expenditure is obviously to be taken into consideration under Section 80M of the Act in the facts of the present case.”

39 ITA No.4894/Mum/2008 for earning dividend hence, the expenditure incurred by way of interest on the loan taken by the assessee for the said purpose cannot be held to be an expenditure incurred wholly and exclusively for the purpose of earning income by way of dividends, and, therefore, it would not be allowable as a deduction under Section 57(iii) of the Act. However, the Hon’ble Bombay High Court in para 4 of the judgement (supra) has observed as under: “4. It may be pertinent to mention the distinction in the language used by the Legislature in Sections 37(1) of the Act and 57(iii) of the Act. Section 37 provides for deduction of expenditure incurred wholly and exclusively "for the purpose of business" whereas Section 57(iii) provides for deduction only of expenditure incurred wholly and exclusively "for the purpose of making or earning such income". "Such income" refers to "income from other sources". The expression "for the purpose of business" is narrower than the expression "for the purpose of making or earning such income". In order that an expenditure may be admissible under Section 57(iii) it is necessary that the primary motive of incurring it is directly to earn income falling under the head "Income from other sources". That is not so under Section 37 which allows deduction of expenditure "incurred wholly and exclusively for the purposes of the business". Under Section 57(iii), deduction will not be allowed if the expenditure is not incurred for the purpose of earning income falling under the head "Income from other sources".

40 ITA No.4894/Mum/2008 share capital of the companies promoted by it as controlling interest and therefore, takes active interest in the business of these companies.

41 ITA No.4894/Mum/2008 income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.”

“We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.”

42 ITA No.4894/Mum/2008 Court thereafter held in the said case that since the sister concern was a subsidiary of the assessee company and the assessee company being the holding company had a deep interest in its subsidiary, hence the loan advanced to subsidiary was out of commercial expediency.

43 ITA No.4894/Mum/2008 Ltd.” (Supra) as well as of the Hon’ble Bombay High Court in the case of “Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT” (supra) that no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to exempt income. It is an admitted fact that the assessee had earned substantial dividend income during the year out of the investments made. The assessee has not contested the applicability of the provisions of section 14A in relation to the exempt income received. The assessee has chosen not to rebut the contentions of the DR that only the net dividend income can be allowed to be exempted from tax and not the gross dividend receipts. The Ld. AR has also not advanced any arguments regarding the applicability of the provisions of section 115-O of the Act.

44 ITA No.4894/Mum/2008 such a disallowance and what method should be adopted to calculate the expenditure incurred in relation to exempt income for the purpose of disallowance.

45 ITA No.4894/Mum/2008 not retrospective and applies from A.Y. 2008-09. For the years for which Rule 8D is not applicable and in the event of that the AO is not satisfied with the explanation/working given by the assessee, disallowance under section 14A has to be made on a reasonable basis. Almost similar view has been expressed by Hon'ble Delhi High Court in the case of 'Maxopp Investment Ltd. & Others' vs. CIT (247 ITR 162). Hence, the rule 8 D of the Income Tax Rules is not applicable for the Assessment year under consideration. Disallowance under section 14 A, thus, can be made on some reasonable basis for the year under consideration and not under rule 8 D as held by the Hon’ble Bombay High Court in the case of ‘Godrej & Boyce Manufacturing Co. Ltd’. (supra).

46 ITA No.4894/Mum/2008 Tribunal directing the AO to restrict the disallowance to the extent of 2% of the total exempt income earned by the assessee.

The Hon’ble Delhi High Court in the case of “M/s Cheminvest Ltd. vs. CIT” (2015) 61 taxman.com 118, wherein also the assessee had made strategic investments in subsidiaries/Group Companies for retaining control over them but has not received any dividend income from such investments, has held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year and that the expression ‘does not form part of the total income’, in section 14A of the Act envisages that there should be an actual receipt of income which is not included in the total income during the relevant previous year for

47 ITA No.4894/Mum/2008 the purpose of disallowing any expenditure incurred in relation to the said income.

Almost identical issue has been taken by the Hon’ble Allahabad High Court in the case of “CIT Kanpur vs. M/s. Shivam Motors Pvt. Ltd.” in ITA No.88 of 2014 vide order dated 05.05.2014; by the Hon’ble Gujarat High Court in the case of “CIT vs. Corrtecth Energy Pvt. Ltd.” in ITA No.239 of 2014 vide order dated 24.03.2014 and by the Hon’ble Bombay High Court in the case of “CIT vs. M/s. Delite Enterprises” in ITA No.110 of 2009 vide order dated 26.02.09.

48 ITA No.4894/Mum/2008 offered the interest amount for taxation and the assessment was completed on that basis. Before the Ld. CIT (A), the assessee though had taken a number of grounds of appeal; however, the inclusion of the said amount of interest was not challenged. The inclusion of the said amount of interest was not objected to even in the grounds of appeal as originally filed before the Tribunal. However, the assessee by way of subsequent letter raised the additional ground in relation to the said inclusion of interest into the income of the assessee. In the above circumstances, the question before the Hon’ble Supreme Court was “Where on the facts found by the authorities below a question of law arises (though not raised before the authorities) which bears on the tax liability of the assessee, whether the Tribunal has jurisdiction to examine the same?” The Hon’ble Supreme Court while answering the said question observed that under section 254 of the Income Tax Act, the power of the Tribunal in dealing with the appeals is expressed in the widest possible terms; the power of the Tribunal under section 254 is not restricted only to decide the grounds which arise from the order of the Commissioner of Income Tax (Appeals); that both the assessee as well as the department have a right to file an appeal/cross objection before the Tribunal and the Tribunal is not prevented from considering questions of law arising in assessment proceedings although not raised earlier. While answering the question in affirmative, the Hon’ble Supreme Court concluded that the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee. The full bench of the Hon’ble Bombay High Court in the cases of “Ahmedabad Electricity Company Ltd. vs. CIT” and “Godavari Sugar Mills Ltd. vs. CIT” by way of a common order

49 ITA No.4894/Mum/2008 dated 30.04.1992 (1993) 199 ITR 351 has observed that the basic purpose of an appeal procedure in an income tax matter is to ascertain the correct tax liability of the assessee in accordance with law. Therefore, at both the stages, either by the Appellate Assistant Commissioner or before the Appellate Tribunal, the appellate authority can consider the proceedings before it and the material on record before it for the purpose of determining the correct tax liability of the assessee. The Hon’ble Bombay High Court in the case of “CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd.” (2012) 349 ITR 336 (Bom.) has observed that the assessee is entitled to raise not merely additional legal submissions before the appellate authorities, but is also entitled to raise additional clams before them. The appellate authorities have jurisdiction to deal not merely with additional grounds, which became available on account of change of circumstances or law, but with additional grounds which were available when the return was filed. The words ‘could not have been raised’ must be construed liberally and not strictly. There may be several factors justifying the raising of a new plea in an appeal and each case must be considered on its own facts. The co-ordinate bench of the Tribunal in the case of “Shri Chandrashekhar Bahirwani” ITA No.7810/M/2010 and 6599/M/2011 vide order dated 17.06.2015 while deciding the question as to whether the income cannot be assessed less than the returned income has observed as under: “5. Now coming to the finding of the Ld. CIT(A), that income cannot be assessed less than the returned income, the Ld. A.R. of the assessee has submitted before us that the action of the Ld. CIT(A) in rejecting the claim of the assessee on this ground was not justified. He has further relied upon the decision of the Hon’ble Gujarat High Court in the case of “Gujarat Gas Ltd. vs. JCIT” (2000) 245 ITR 84. In the said case, the words of the Circular No.549, para 5.12, dt. 31st October, 1989, providing that the assessed income under section 143(3) shall not be less than the returned income was considered by the Hon’ble High Court and it was held that as per proviso to section

50 ITA No.4894/Mum/2008

119 of the Act, the Board cannot issue instructions to the Income Tax Authority to make a particular assessment or to dispose of a particular case in a particular manner as well as not to interfere with the discretion of the Commissioner in exercise of his appellate functions. It was further held that the AO, while exercising his quasi judicial powers, was not bound by the said circular and should have exercised his powers independently. The Hon’ble High Court, therefore, directed the AO to make the assessment without keeping in mind the said circular. It may be further observed that the Hon’ble Bombay High Court in the case of ‘Pruthvi Brokers & Shareholders Pvt. Ltd.’ ITA No.3908 of 2010 decided on 21.06.12, while relying upon the various decisions of the Hon’ble Supreme Court and other Hon’ble High Courts has held that even if a claim is not made before the AO, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim is not barred. The Hon’ble High Court has further observed that the decision of the Hon’ble Supreme Court in the case of ‘Goetze (India) Limited v. CIT’ (2006) 157 Taxman 1, relating to the restriction of making the claim through a revised return was limited to the powers of the Assessing Authority and the said judgment does not impinge on the power or negate the powers of the appellate authorities to entertain such claim by way of additional ground. Even otherwise, the Ld. CIT(A) ought to have considered the claim of the assessee in exercise of his appellate jurisdiction under section 250 of the Act. Moreover, if the assessee is, otherwise, entitled to a claim of deduction but due to his ignorance or for some other reason could not claim the same in the return of income, but has raised his claim before the appellate authority, the appellate authority should have looked into the same. The assessee cannot be burdened with the taxes which he otherwise is not liable to pay under the law. Even a duty has also been cast upon the Income Tax Authorities to charge the legitimate tax from the tax payers. They are not there to punish the tax payers for their bonafide mistakes. In view of our above observations, it is held that the assessee is not liable to pay Capital Gains Tax, though originally he had subjected himself to the said tax as per his return of income. The AO is directed to process the claim of refund in this respect as per provisions of the law.”

51 ITA No.4894/Mum/2008 32. Grounds No. 4 & 5: The Ld. Counsel for the assessee has stated at the Bar that he does not press Grounds No 4 & 5. Theses grounds are therefore dismissed as not pressed.

52 ITA No.4894/Mum/2008 debentures would be revenue in nature, irrespective of whether the borrowing is a long term or short term one. This issue is accordingly decided in favour of the assessee. 35. Ground No. 7: Ground No. 7 relates to the issue of disallowance of expenditure in the shape of upfront fees and brokerage etc. paid for issuing the non-convertible debentures. The AO concluded that since the term of the debentures was spread over two years, hence benefit arrived at by the assessee was of enduring nature spread over two years. The AO therefore calculated the expenses pertaining to the year under consideration and disallowed the remaining expenses.

53 ITA No.4894/Mum/2008 38. Ground No. 9 has also not been pressed by the ld. AR owing to the smallness of the amount involved. This ground is therefore, dismissed as not pressed.

54 ITA No.4894/Mum/2008

Ld. D.R. has not brought any decision contrary to the above decision of the Hon’ble Bombay High Court. Hence, respectfully following the decision of the Jurisdictional High Court, this issue is accordingly decided in favour of the assessee.

Sd/- Sd/- (G. S. PANNU) (SANJAY GARG) JUDICIAL MEMBER ACCOOUNTANT MEMBER

Mumbai, Dated 20 July, 2016 Lakshmikanta Deka/Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT (A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER,

Assistant Registrar ITAT, MUMBAI