CIT v Reliance Industries [2019] 410 ITR 466 (SC) Facts: Assessee had given interest-free loans to its subsidiaries as on 31-03-2003 aggregating Rs. 6,716.12 crores and as on 31-03-2002 was 2,988.98 crores; thus the incremental loans given during the year amounted to Rs. 3,727.14 crores. The net profit after tax and before depreciation exceeded not only the differential/incremental loan given to subsidiaries during the year but also exceeds the total interest free loans of Rs. 6,716.12 crores given to the subsidiaries as on 31-3-2003. Bombay High Court’s decision: It is already settled principle by this Court in the case of Reliance Utilities & Power Ltd that if there were funds available both interest free and overdraft / or loans taken, then presumption would arise that investment would be out of interest free funds generated or available with the company. It was held that if interest free funds were sufficient to meet the investments made, in that case a presumption is established that the borrowed capital was used for the purpose of business and the interest expenditure is deductible under section 36(1)(iii) of the Act. The Tribunal held that the interest free fund available to the assessee is sufficient to meet its investment. It can be presumed that investments were made from interest free funds available with the assessee. This position clearly emerges from the record and for the current assessment year as well. There is no perversity when nothing contrary to the factual material was brought on record by the Revenue. Supreme Court’s decision: The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. In view of the above findings, we find no reason to interfere with the judgment of the High Court. NOTE: The controversy in relation to disallowance u/s 36(1)(iii) / 14A in relation to allowability of interest cost is long drawn. This Apex Court ruling upholds the principle of presumption of investment out of owned funds in a scenario where there is a mixed pool of funds and it is difficult to identify specific cost incurred in relation to interest-free advances / investments. It is pertinent to note that in the Apex Court ruling in the case of Maxopp Investment / Avon Cycles [2018] 402 ITR 640 (SC), the assessee had suo motu offered disallowance of interest cost before ITAT (where there were mixed pool of funds) by apportioning part of the interest cost towards investment. Supreme Court in that case had remarked that after applying the principle of apportionment, it did not find any merit in the appeal. No particular reference is made to the aforesaid decision in the instant case. However, it is relevant to note that Supreme Court, in its earlier rulings also, in the case of East […]
Disallowance u/s 14A
CIT v India Advantage Securities Ltd (ITA No 1131 OF 2013 dated 13.04.2015) BOMBAY HIGH COURT Background: The assessee had received dividend income of Rs Rs.1,40,859/- which was exempt from tax. The assessee had however, not made any disallowance of expenses relating to exempt income. The A.O. in the course of assessment proceedings therefore, computed the disallowance u/s.14A as per Rule 8D which come to Rs.48,73,483/- consisting of interest expenditure of Rs.39,00,174/- and other expenses of Rs.9,73,309/-. In the first level appellate proceedings, the assessee contended that the interest expenditure had been claimed by the assessee as deduction u/s.36(1)(iii). It was also submitted that the shares had been shown as stock-in-trade in the books of accounts and, therefore, such stock-in-trade could not be taken into account while computing the disallowance under Rule 8D. The CIT(A) was satisfied by the explanation given and agreed that the disallowance under Rule 8D could be made only with respect to investment and not in stock-in-trade.
Bombay HC confirms that Stock-in-trade to be excluded while computing 14A disallowance r.w. Rule 8D
Anriya Project Management Services(P)Ltd. v DCIT (ITA No.1799/Bang/2013 dated 20.02.2015) – Bangalore ITAT Background: The assessee during the year did not earn any exempt income and therefore, did not make any disallowance under section 14A in its return of income. However, the AO made disallowance u/s 14A holding that there is increase in the investment of the assessee during the relevant assessment year resulting in increase of interest on total loans and thus interest bearing funds were utilized in investments earning exempt income. Therefore, he held that proportionate interest on investments earning exempt income is disallowable.
CBDT circular on 14A disallowance in the absence of exempt income is invalid – Bang ...
M/s Eicher Motors Ltd v DCIT (ITA No.207 /Del /2013 dated 12.12.2014) – Delhi ITAT Background: The assessee incurred consultancy charges of Rs 20,36,319 for services rendered in relation to bid-cum-delisting of shares of Eicher Limited, a subsidiary company. During the course of assessment proceedings, the assessee submitted that the said expenses were incurred for acquisition of the entire controlling interest in subsidiary company – Eicher Limited since the assessee was a promoter of the said subsidiary and also has business interest in it. It was, further, submitted that the assessee being a promoter of Eicher Limited and holding business interest in that company, decided to acquire entire control over that company and, consequently, made an open offer to the public share-holders to acquire their shares and delist Eicher Limited from Stock Exchange for which services of J M Morgan Stanley Pvt. Ltd [Merchant Banker] and ILFS Investments Securities Limited [Syndicate Member] were obtained. Pursuant to the delisting of shares of Eicher Limited [after acquisition of shares from public share-holders], Eicher Limited was amalgamated with the assessee w.e.f. 4.3.2008 pursuant to the scheme of amalgamation being approved by the Hon’ble High Court of Delhi. However, the AO disallowed the expenditure holding that the expenditure was capital in nature as the same was incurred in relation to acquisition of a new asset. The CIT(A) confirmed the disallowance.
Expenditure incurred for acquisition of controlling stake in subsidiary is revenue in nature – Delhi ...
ACIT vs. Dhampur Sugar Mill Pvt. Ltd (ITA No 220 of 2014 dated 05.11.2014) (Allahabad High Court) Background: The assessee is engaged in the business of the manufacture and sale of sugar, chemicals and power, and has a distillery. For the FY 2007-08, the assessee had incurred interest on working capital which was debited to P&L A/c. During the course of assessment proceedings, the AO observed that assessee had invested some of its funds in shares and the dividend income which had been or was receivable on these investments did not form part of the total income. Holding that certain expenses, such as on account of interest, were directly attributable to the exempt income, the AO made disallowance of Rs 67.75 lakhs under section 14A.
Interest incurred exclusively for business purpose cannot be subject to disallowance u/s 14A – Allahabad ...
Bellwether Microfinance Fund Pvt Ltd v ITO (ITA No. 1743/Hyd/2013 dated 27.06.2014) Hyderabad ITAT Background: Assessee is a non-banking financing company engaged in the business of investing in microfinance companies in India. Assessee entered into a fund management agreement with Caspian Advisors Pvt. Ltd. (‘CAPL’) on 27/05/2005 as per which the said company would render consultation services to the assessee in the matter of investment etc. as fund manager. CAPL was holding 18.7% shareholding in the assessee company. The fund manager was to be paid remuneration for the fund based services. During the course of assessment proceedings, the AO noticed that while computing its income, assessee has disallowed expenditure of Rs. 35,65,860/- under section 14A read with Rule 8D. The assessee under clause (i) of Rule 8D(2) i.e. amount of expenditure directly relating to income which does not form part of total income had already disallowed an amount of Rs 25,20,080 towards fund management fees. However, on the basis of the agreement with fund manager, AO worked out the fees paid to the fund manager and arrived at an amount of Rs 2,47,49,044 as fees paid. The AO then reworked the disallowance and added Rs. 1,97,36,624/- to the income of the assessee.
Expenditure incurred in relation to exempt income earned only during that year to be considered ...
D. H. Securities Pvt. Ltd vs. DCIT (ITAT Mumbai) (Third Member) Background: The assessee claimed that as it was engaged in the business of trading in shares, its main object is to earn profit on purchase and sale of shares and not to earn dividend income from such shares. It claimed that the accrual of tax-free dividend on such shares was merely incidental to the holding of shares as stock-in-trade and that no disallowance could be made u/s 14A and Rule 8D. It also claimed that though the assessee had not incurred any direct or indirect expenditure to earn the said dividend, the AO had made the disallowance on a presumptive basis. The Division Bench referred the dispute to a Third Member in view of the difference of opinion between the Benches. Before the Third Member, the assessee relied on CCI Ltd 71 DTR (Kar) 141 , India Advantage Securities, Yatish Trading etc in which the law had been laid down that s. 14A & Rule 8D does not apply to securities held as stock-in-trade. The department reied on Godrej & Boyce Manufaturing Co 328 ITR 81 (Bom) (where it was held that Rule 8D is mandatory) and Daga Capital 117 ITD 169 (Mum) (SB) (where it was held that s. 14A applies to stock-in-trade).
Disallowance u/s 14A applicable even if shares are held as stock-in-trade – Mum ITAT (TM)
CIT v Gujarat State Fertilizers & Chemicals Ltd [Tax Appeal No. 126 of 2013 dated 25/06/2013] Gujarat High Court 14A Disallowance Background: The assessee earned dividend income from certain investments. The Assessing Officer stated that the onus was not discharged by the assessee to establish that the investment from where dividend has been received was out of its own funds and no borrowed funds have been utilised for making such investment on the basis of cash/fund flows statement. The AO on an estimated basis deducted 10% of the total dividend income as expenditure including the interest in relation to earning of exempt income and the sum of Rs.1,14,43,040/- was disallowed as per the provision of Section 14A of the Act.
No 14A disallowance of interest exp where owned funds exceed amount of investments & other ...
Oasis Securities Ltd. v DCIT IT APPEAL NO. 8009 (MUM.) OF 2011 dtd 20.02.13 (Mumbai ITAT) Background: The assessee company is engaged in the activity of stock broking and providing financial services. The assessee earned tax-free dividend income of Rs. 1,73,580 and the same has been claimed as exempt. The AO has stated that assessee has not allocated any expense incurred for earning of such tax-free income. Assessee stated that no expenditure has been incurred to earn the exempted income. However, AO did not agree with above contention of assessee and by applying r. 8D disallowed the same as per sec. 14A of the Act.