Cheminvest Limited vs Commissioner Of Income Tax-Vi
2015 Latest Caselaw 6509 Del

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*       IN THE HIGH COURT OF DELHI AT NEW DELHI
16.
+                         ITA 749/2014

        CHEMINVEST LIMITED                                      ..... Appellant
                          Through: Mr Ajay Vohra, Senior Advocate with
                          Ms. Kavita Jha and Mr. Vaibhav Kulkarni,
                          Advocate.

                          versus

        COMMISSIONER OF INCOME TAX-VI              ..... Respondent
                    Through: Ms Suruchi Aggarwal, Senior Standing
                    Counsel with Ms. Lakshmi Gurung, Advocate.

        CORAM:
        HON'BLE DR. JUSTICE S. MURALIDHAR
        HON'BLE MR. JUSTICE VIBHU BAKHRU

                          ORDER

% 02.09.2015

1. This is an appeal filed by the Assessee under Section 260A of the Income

Tax Act, 1961 („Act‟) against the order dated 4th January, 2013 passed by

the Income Tax Appellate Tribunal („ ITAT‟) in ITA No.87/DEL/2008 for

the Assessment Year („AY‟) 2004-05.

2. Admit.

3. The following substantial question of law is arises for determination:

"Whether disallowance under Section 14A of the Act can be made in

a year in which no exempt income has been earned or received by the

Assessee?"

4. The Appellant is engaged in the business of making investment in shares

and accepting/granting of loans. The Assessee is one of the co-promoters of

Max India Ltd.

5. In the AY in question, the Appellant borrowed funds on which interest

expenditure of Rs.1,21,03,367/- was incurred. The factual assertion of the

Appellant, which has not been controverted, is that in the relevant AY no

dividend income was earned by the Appellant from the amount invested in

various shares. For the AY in question, the Appellant filed a return of

income declaring a loss of Rs.13,84,086/-. This case was picked up for

scrutiny and the Assessing Officer (AO) completed the assessment under

Section 143(3) of the Act disallowing Rs.97,87,570/- out of the total

expenditure incurred during the year under Section 14A of the Act. The

reason recorded by the AO for this disallowance was that the borrowed

funds were utilized for the purpose of purchase of shares for the purpose to

earn dividend income which is exempted under section 10(33) of the Act

and thus, not forming a part of the total income, and therefore the interest

paid thereon had to be disallowed under Section 14A.

6. It may be mentioned at this stage that the Assessee has made a distinction

between investments in unquoted shares, which was in the sum of

Rs.4,16,155/-, and investments in shares (other than trade) on long term

basis to the extent of Rs.6,88,70,000/-. Based on the aforementioned

distinction, the AO in the assessment order dated 28 th December, 2006,

computed the disallowance as Rs.97,87,570/- being the interest paid on

borrowed funds invested in long terms shares.

7. Mr. Ajay Vohra, learned Senior counsel appearing for the Assessee,

produced the balance sheet and profit and loss account as well as the

computation of income prepared by the Assessee for the AY in question i.e.

2004-05. In the balance sheet, it is seen that the investment in quoted shares

of Max India Limited is shown under the head „quoted-other than trade-long

term‟. An investment of approximately Rs.2,13,38,698 over the previous

year has been made in the shares of Max India Ltd. It is also seen that the

investments in other investment companies to the extent of Rs.4,61,155 is

shown under the sub-head „unquoted-trade-long term‟. This figure has

remained unchanged over the previous year. In the computation filed for the

purposes of the income tax return, the details of investments have been

shown in two broad categories of „capital assets‟ and „trading assets‟ and the

investment in Max India Limited is under the head „trading assets‟ with the

investments in the investment companies shown under the head of „capital

assets‟.

8. The AO appears to have proportionately disallowed, for the purposes of

Section 14A of the Act, the interest attributable to the long term investment

(other than trade) for the purposes of earning exempted income. Since the

unsecured loan borrowed for the purpose was Rs.6,88,70,000 the

disallowance of the amount under Section 14 A of the Act was calculated

thus:

"1,21,03,367 x 6,88,70,000 = Rs. 97,87,570 8,51,65,000"

9. The CIT (A) by an order dated 27th September 2007 upheld the

applicability of Section 14A of the Act but agreed with the contention of the

Appellant that only the net interest amount debited in the profit and loss

account was required to be proportionately disallowed under Section 14A of

the Act.

10. In the appeals filed both by the Revenue and the Assessee before the

ITAT, a Special Bench was constituted to decide the question regarding

applicability of Section 14A of the Act in an year when no exempt income

had been earned. The Special Bench by an order dated 5th August 2009

answered the question by inter alia referring to the decision of the Supreme

Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). The

reasoning of the Special Bench was as under:

"22. The controversy raised in this case is that the assessee had not earned or received any dividend in the year under consideration and, therefore, no disallowance can be made by invoking the provisions of Section 14A of the Act. We do not find any force in this contention of the assessee. When the expenditure of interest is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not. Section 14A does not envisage any such exception. This is even if the interest paid on borrowings for the purchase of share were allowable u/s 57 as an expenditure incurred for earning or making income as held by the Supreme Court in the case of Rajendra Prasad Moody (supra) or u/s 36 (l)(iii) as an expenditure incurred wholly and exclusively for the purposes of business as held by various decisions right from beginning of the Income Tax Act. When, prior to introduction of section 14A, an

expenditure both u/s 36 and 57 was allowable to an assessee without such requirement of earning or receipt of income, we cannot import any such condition when it comes for disallowance of the same expenditure u/s 14A of the Act. This is what is held by the Ahmedabad Bench of the Tribunal in the case of Harish Krishnakant Bhat (supra) when it observed that interest on monies borrowed for purchase of shares held as investment is not allowable whether or not there is any yield of dividend. It is so held by applying the decision of the Supreme Court in Rajendra Prasad Moody (supra) in the reverse case wherein it is that irrespective of dividend receipt, expenditure has to be allowed. Now since dividend is exempt, as a consequence thereof expenditure has to be disallowed."

11. The Special Bench of the ITAT negatived the submission of the

Appellant that the language of both Sections 57 (iii) and Section 14A of the

Act were materially different. The Appellant's further contention and that

since the decision in Rajendra Prasad Moody (supra) was only in the

context of purchase of shares in which case a deduction of expenses can be

claimed under Section 57(iii) of the Act whereas in the present case the

Assessee was entitled to deduction of expenses under Section 36(1)(iii) of

the Act and, therefore, Section 14A cannot be applied, was also rejected.

12. The matter was then placed before the regular Bench of the ITAT which

passed the impugned order on 4th January 2013 remanding the matter to the

file of the AO for reconsideration of the issue afresh. The ITAT referred to

the decision of this Court in Maxopp Investment Ltd. v. Commissioner of

Income-tax, New Delhi (2012) 347 ITR 272 (Del).

13. At the hearing of this case on 6th July 2015, the Court had asked the

parties to also address the issue of whether the interest paid on borrowings

for the purposes of investment by the Assessee could be treated as business

expenditure?

14. Mr. Vohra has placed before the Court a large number of decisions

including the decision of this Court in Eicher Goodearth Ltd. v.

Commissioner of Income-tax [2015] 60 taxmann.com 268 (Delhi) which

answered the question in the affirmative. Mr. Vohra has also placed reliance

on decisions of the Supreme Court in CIT v. Chugandas & Co. [1964] 55

ITR 17 (SC) and CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR

306 (SC) which hold that where shares were held as business investment, the

dividend income though assessable to tax under the head „income from other

sources,‟ would retain its character as business income for all intents and

purposes. In the latter decision it was specifically held that the income from

securities which forms part of the Assessee‟s trading assets or part of its

income in business if loss incurs in business would be set off against that

income in succeeding years. Mr. Vohra pointed out that even in the

Assessee‟s case the business loss of previous year has been set off against

the income of the subsequent years.

15. Turning to the central question that arises for consideration, the Court

finds that the complete answer is provided by the decision of this Court in

CIT v. Holcim India (P) Ltd. (decision dated 5th September 2014 in ITA

No. 486/2014). In that case a similar question arose, viz., whether the ITAT

was justified in deleting the disallowance under Section 14A of the Act

when no dividend income had been earned by the Assessee in the relevant

AY? The Court referred to the decision of this Court in Maxopp Investment

Ltd. (supra) and to the decision of the Special Bench of the ITAT in this

very case i.e. Cheminvest Ltd. v. CIT (2009) 317 ITR 86. The Court also

referred to three decisions of different High Courts which have decided the

issue against Revenue. The first was the decision in Commissioner of

Income Tax, Faridabad v. M/s. Lakhani Marketing Incl. (decision dated

2nd April 2014 of the High Court of Punjab and Haryana in ITA No.

970/2008) which in turn referred to two earlier decisions of the same Court

in CIT v. Hero Cycles Limited [2010] 323 ITR 518 and CIT v. Winsome

Textile Industries Ltd. [2009] 319 ITR 204. The second was of the Gujarat

High Court in Commissioner of Income Tax-I v. Corrtech Energy (P) Ltd.

[2014] 223 Taxmann 130 (Guj.) and the third of the Allahabad High Court

in Commissioner of Income Tax, Kanpur v. Shivam Motors (P) Ltd.

(decision dated 5th May 2014 in ITA No. 88/2014). These three decisions

reiterated the position that when an Assessee had not earned any taxable

income in the relevant AY in question "corresponding expenditure could not

be worked out for disallowance."

16. In CIT v. Holcim India (P) Ltd. (supra), the Court further explained as

under:

"15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an

investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax."

17. On facts, it was noticed in CIT v. Holcim India (P) Ltd. (supra) that the

Revenue had accepted the genuineness of the expenditure incurred by the

Assessee in that case and that expenditure had been incurred to protect

investment made.

18. In the present case, the factual position that has not been disputed is that

the investment by the Assessee in the shares of Max India Ltd. is in the form

of a strategic investment. Since the business of the Assessee is of holding

investments, the interest expenditure must be held to have been incurred for

holding and maintaining such investment. The interest expenditure incurred

by the Assessee is in relation to such investments which gives rise to income

which does not form part of total income.

19. In light of the clear exposition of the law in Holcim India (P) Ltd.

(supra) and in view of the admitted factual position in this case that the

Assessee has made strategic investment in shares of Max India Ltd.; that no

exempted income was earned by the Assessee in the relevant AY and since

the genuineness of the expenditure incurred by the Assessee is not in doubt,

the question framed is required to be answered in favour of the Assessee and

against the Revenue.

20. Since the Special Bench has relied upon the decision of the Supreme

Court in Rajendra Prasad Moody (supra), it is considered necessary to

discuss the true purport of the said decision. It is noticed to begin with that

the issue before the Supreme Court in the said case was whether the

expenditure under Section 57 (iii) of the Act could be allowed as a deduction

against dividend income assessable under the head "income from other

sources". Under Section 57 (iii) of the Act deduction is allowed in respect of

any expenditure laid out or expended wholly or exclusively for the purpose

of making or earning such income. The Supreme Court explained that the

expression "incurred for making or earning such income‟, did not mean that

any income should in fact have been earned as a condition precedent for

claiming the expenditure. The Court explained:

"What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure."

21. There is merit in the contention of Mr. Vohra that the decision of the

Supreme Court in Rajendra Prasad Moody (supra) was rendered in the

context of allowability of deduction under Section 57(iii) of the Act, where

the expression used is „for the purpose of making or earning such income‟.

Section 14A of the Act on the other hand contains the expression „in relation

to income which does not form part of the total income.‟ The decision in

Rajendra Prasad Moody (supra) cannot be used in the reverse to contend

that even if no income has been received, the expenditure incurred can be

disallowed under Section 14A of the Act.

22. In the impugned order, the ITAT has referred to the decision in Maxopp

Investment Ltd. (supra) and remanded the matter to the AO for

reconsideration of the issue afresh. The issue in Maxopp Investment Ltd.

(supra)was whether the expenditure (including interest on borrowed funds)

in respect of investment in shares of operating companies for acquiring and

retaining a controlling interest therein was disallowable under Section 14 A

of the Act. In the said case admittedly there was dividend earned on such

investment. In other words, it was not a case, as the present, where no

exempt income was earned in the year in question. Consequently, the said

decision was not relevant and did not apply in the context of the issue

projected in the present case.

23. In the context of the facts enumerated hereinbefore the Court answers

the question framed by holding that the expression „does not form part of the

total income‟ in Section 14A of the envisages that there should be an actual

receipt of income, which is not includible in the total income, during the

relevant previous year for the purpose of disallowing any expenditure

incurred in relation to the said income. In other words, Section 14A will not

apply if no exempt income is received or receivable during the relevant

previous year.

24. Consequently, the impugned order of the ITAT is set aside and the

appeal is allowed in the above terms. This Court should not be understood to

have expressed any opinion on the issue of whether for the AY in question

the interest expenditure incurred by the Assessee would be allowable as

business expenditure under Section 36 (1)(iii) of the Act.

S. MURALIDHAR, J

VIBHU BAKHRU, J SEPTEMBER 2, 2015 mk/dn