CIT v Gujarat State Fertilizers & Chemicals Ltd [Tax Appeal No. 126 of 2013 dated 25/06/2013] Gujarat High Court
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.
The CIT (Appeals) held that the Assessing Officer has failed to clearly show that any particular expenditure was incurred by the assessee to earn exempt dividend income, adhoc disallowance made of Rs.1,14,43,040/- is deleted.
- Assessee’s own funds were higher than the investment made by the assessee and, therefore, it was not possible to hold that the interest bearing funds were diverted for making investment in shares and, therefore, under Section 14A of the Act, it held that there was no question of disallowance in respect of interest expenditure.
- For other expenses, the request was made for restoring the matter back to the AO, however, the assessee with a view to put an end to the entire dispute had agreed with disallowance of Rs.5 lakh, which according to the Tribunal was meeting the ends of justice.
- Section 14A is amplified by the Supreme Court in the case of Walfort Share and Stock Brokers P. Ltd., (2010) 326 ITR 1 (SC) which clarifies that the expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income.
- In the case of an income, like dividend income, which does not form part of the total income, any expenditure incurred by the assessee in relation to such non-taxable income, the claim of deduction of such expenses incurred cannot be allowed.
- Had the Revenue been successful in establishing that the assessee had incurred the expenses to earn the dividend income from the borrowed funds, the entire discussion of application of Section 14A of the Act could be understood.
- However, when both the CIT (Appeals) and the Tribunal have noted that the assessee had sufficient funds available with it, which was more than the amount it invested for earning the dividend income, both these authorities have correctly approached the issue by setting aside the order of disallowance under Section 14A of the Act in respect of interest expenditure.
- When the very basis for employing Section 14A of the Act on factual matrix is lacking, the disallowance to the extent of 10% of dividend income was not permissible.
Corporate Debt Restructuring (CDR) Expenses – Capital vs Revenue
Assessee paid the sum of Rs.2.57 crores to the financial consultant M/s. Brescon Corporate Advertisers Ltd., who provided their professional services in connection with the scheme of CDR by negotiating with the banks and financial institutions, which eventually helped the reduction of interest burden of the assessee.
The Assessing Officer held that the assessee would derive benefit of enduring nature as a result of CDR exercise and, therefore, it was of the opinion that all the expenses are to be treated as capital expenditure. The Assessing Officer relied upon the decision of the Supreme Court in the case of India Cements Ltd. v. CIT, 60 ITR 52 (SC).
- Reliance was placed on on the decision of the Madras Industrial Investment Corporation Ltd. v. CIT, 225 ITR 802 wherein the Supreme Court was deciding whether a particular expenditure was revenue expenditure incurred for the purpose of business or capital in nature.
- CIT(A) has decided this issue in favour of assessee by following these very judgments of Hon’ble Apex Court which are cited by the Ld.AR of the assessee and considering the facts of the present case, there is no reason to interfere in the order of Ld.CIT(A) on this issue.
- For the waiver of the loan, the payment has been made to the financial consultants. This was for the purpose of business and the same was held to be allowable under Section 37(1) of the Act.
- Having held the said amount to be revenue in nature applying the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra), when the amount has been spread over a period of six years, no error is committed by both the authorities.
- Once the expenditure is held to be revenue in nature incurred wholly and exclusively for the purpose of business, it can be allowed in its entirety in the year in which it is incurred.
Waiver of loan held to be capital receipt:
Assessee treated the waiver of loan of Rs 11.63 crores as capital receipt. Reliance was placed on the decision of CIT v. Chetan Chemicals Pvt. Ltd., 267 ITR 770 (Guj.), wherein it was held that:
“Section 28 of the Act deals with profits and gains of business or profession and clause (iv) thereof says that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable as income under head ‘Profits & Gains of business or profession. As the assessee company is not carrying on the business of obtaining loan, it is held that the remission of such loan by the creditors was not a benefit arising out of such business and, therefore, such remission of unsecured loan was not taxable at the ends of the assessee.”
On thorough examination of the issue, we are of the firm opinion that the issue is squarely covered by the decision of this Court rendered in Chetan Chemicals Pvt. Ltd. (supra).