Delhi High Court
Cit vs Machino Plastic Ltd on 28 February, 2012
Author: Sanjiv Khanna
Bench: Sanjiv Khanna, R.V. Easwar
$~4
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision : 28th February, 2012.
+ ITA 92/2011
CIT ..... Appellant
Through Mr. Sanjeev Sabharwal, sr.
standing counsel
versus
MACHINO PLASTIC LTD ..... Respondent
Through Dr. Rakesh Gupta with Ms. Rani
Kiyala, Advs.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
SANJIV KHANNA,J: (ORAL)
This appeal by the Revenue under Section 260A of the Income
Tax Act, 1961 („Act‟, for short) pertains to assessment year 2001-02.
After hearing counsel for the parties, we frame the following
substantial question of law :
"Whether Income Tax Appellate Tribunal was justified
ITA 92/2011 Page 1 of 11
in deleting the disallowance under Section 14A of the
Income Tax Act, 1961?"
2. The assessee is a company and has made investment in equity
shares, preference shares and bonds as per details given below :
S. Particulars Year of Amount Source of Dividend Interest
No. Investment Invested Fund Received Received
during the during
Fin. Year the Fin.
2000-01 Year
2000-01
1. Equity 1994-95 1,25,00,000 Retained 18,75,000 --
Share earning of
capital of the Business
Caparo
Maruti
Limited
2. Equity 1997-98 4,00,00,000 Issue of -- --
Share Share
capital of Capital in
Machino consideration
Basell of Re-
India arrangement
Limited. of business.
3. Preference 1998-99 2,60,00,000 Issue of 44,12,877 --
Share Preference
capital of Share
Machino Capital in
Basell consideration
India of Re-
Limited. arrangement
of business.
4. Bond of 1999-00 5,00,00,000 Capital gain -- 59,83,562
ICICI on sale of
ITA 92/2011 Page 2 of 11
Bank Business
invested u/s
54EA for
exemption
form capital
gain tax
5. Investment 1999-00 5,72,50,000 Capital gain 50,01,671 --
in Mutual on sale of
Funds. Business
invested u/s
54EA for
exemption
from capital
gain tax.
Total 18,57,50,000 1,12,89,548 59,83,562
Investment
3. At the outset, we may note that the interest earned on bonds
issued by the ICICI Bank were taxable and therefore in respect of the
said bonds, Section 14A was not applicable. The aforesaid findings
recorded by the CIT(Appeals), were not challenged by the Revenue
before the Income Tax Appellate Tribunal („tribunal‟, for short).
Therefore, we are concerned only with the items at serial nos.1 to 3
and 5 of the aforesaid table.
4. The tribunal in the impugned order has examined the factual
matrix relating to acquisition/purchase of the equity shares
ITA 92/2011 Page 3 of 11
mentioned at serial nos.1 to 3 and the investment in mutual funds. It
has reached a categorical and a firm conclusion that the borrowed
funds were not utilized for purchase of the equity share capital
mentioned at serial nos.1 to 3 and the investment in the mutual funds.
The aforesaid findings are findings of fact and we do not see any
reason to go into the said aspects. However, we notice that the
Assessing Officer, while making disallowance under Section 14A,
had observed as under:
"In the computation of income assessee has shown a
dividend income of Rs.1,12,89,548/- and claimed the same
as exempt u/s 10(33) of I.T. Act. In response to query as to
why expenses relatable to dividend income be not
disallowed, assessee has filed letters dated 4.3.2003,
5.11.2003 and 17.12.2003 stating that
i) no expenses including interest was incurred to earn
dividend income.
ii) Provisions of section 14A are not applicable since
investment is old.
iii) Dividend was not earned on investment which were made
out of borrowed funds.
The assessee has-not (sic) segregated or lead
evidence to show funds used for making investment in
shares etc. (18.57 crores) were not out of borrowed funds. I
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may add here that investment are old and coming from the
past years but onus is on the assessee to show that
investment in instruments earning Dividend/exempt income
is not out of borrowed funds. The plea of the assessee that
it is an old investment cannot discharge the onus cast upon
assessee. If the funds invested in various assets can not be
identified by the assessee the only other alternative is to
apportion these in the ratio of investments. Assessee has
not discharged the onus to identify fund invested in assets
yielding exempt income."
XXXXXXXXXXX
"The provisions of sec. 14A have been placed after section
14 classifying various heads of income and in the chapter-
iv relating to computation of total income. This means that
provisions of section 14-A are clearly applicable to all
heads of income mentioned in section 14 under chapter IV
including Business Income.
The reply of the assessee has been considered and as
per provisions of sec. 14A as mentioned above, the expense
relatable to earning of exempt income are not allowable.
Scope of Section 14A is wide. Section 14A does not
specify that expenditure incurred by the assessee for
earning income which is excluded from the total income is
to be disallowed. The section provides that expenditure
incurred "in relation" to income which does not form part
of the income will not be allowed. The assessee is earning
dividend income which is exempt u/s 10(33). It is apparent
that assessee is making investments the gains from which
are assessed under the head capital Gains. Therefore, the
assessee derives income from various activities like
business, earning of interest, capital Gains. In the case of
ITA 92/2011 Page 5 of 11
waterfall Estate 219 ITR 563 the bifurcation of expenses
attributable to earning the exempt income was upheld.
Therefore, I am apportioning interest expenses between
exempt income and other income as under. Therefore
provisions of section 14A are applicable in the case of
assessee.
From the above discussion and in view of the fact
that the assessee has not been able to segregate/ earmark
expenses relatable to earning of dividend income, I allocate
the same in the ratio of total funds and investment yielding
exempt income‟ (sic) The interest expenses which are
incurred for various activities are: -
Interest expenses other than Rs.1,25,40,940/-
Term Loan
Total investment in all activities Rs.51,70,04,404/-
i.e. source of funds
Investment in Dividend yielding
Investments Rs.18,57,50,000/-
Disallowance: 185750000 x 12540940 = 45,05,724
517004404
(Addition: Rs.45,05,724/-)"
Accordingly, this addition/disallowance of Rs.45,05,724/- was
made by the Assessing Officer.
ITA 92/2011 Page 6 of 11
5. The CIT(Appeals), as observed above, held that the investment
with reference to the applicability of section 14A should be taken as
Rs.13,57,50,000/- and not as Rs.18,57,50,000/- after inter alia
holding that the investment of Rs.5,00,00,000/- in bonds of ICICI
Bank had not resulted in tax-free income. Accordingly, the
disallowance was proportionately reduced.
6. However, the Tribunal in the impugned order has completely
deleted the disallowance. In the case of Maxopp Investment Ltd. Vs.
Commissioner of Income Tax, New Delhi, ITA No.687/2009
(delivered on 18.11.2011), a Division Bench of this Court has held as
under :
"41. Sub-section (2) of section 14A, as we have seen,
stipulates that the Assessing Officer shall determine the
amount of expenditure incurred in relation to income which
does not form part of the total income "in accordance with
such method as may be prescribed". Of course, this
determination can only be undertaken if the Assessing
Officer is not satisfied with the correctness of the claim of
the assessee in respect of such expenditure. This part of
section 14A(2) which explicitly requires the fulfillment of a
condition precedent is also implicit in section 14A(1) [as it
now stands] as also in its initial avatar as section 14A. It is
ITA 92/2011 Page 7 of 11
only the prescription with regard to the method of
determining such expenditure which is new and which will
operate prospectively. In other words, section 14A, even
prior to the introduction of sub-sections (2) & (3) would
require the assessing officer to first reject the claim of the
assessee with regard to the extent of such expenditure and
such rejection must be for disclosed cogent reasons. It is
then that the question of determination of such expenditure
by the assessing officer would arise. The requirement of
adopting a specific method of determining such
expenditure has been introduced by virtue of sub-section
(2) of section 14A. Prior to that, the assessing was free to
adopt any reasonable and acceptable method.
42. Thus, the fact that we have held that sub-sections (2) &
(3) of section 14A and Rule 8D would operate
prospectively (and, not retrospectively) does not mean that
the assessing officer is not to satisfy himself with the
correctness of the claim of the assessee with regard to such
expenditure. If he is satisfied that the assessee has correctly
reflected the amount of such expenditure, he has to do
nothing further. On the other hand, if he is satisfied on an
objective analysis and for cogent reasons that the amount of
such expenditure as claimed by the assessee is not correct,
he is required to determine the amount of such expenditure
on the basis of a reasonable and acceptable method of
apportionment. It would be appropriate to recall the words
of the Supreme Court in Walfort (supra) to the following
effect:-
"The theory of apportionment of expenditure
between taxable and non-taxable has, in principle,
been now widened under section 14 A."
ITA 92/2011 Page 8 of 11
So, even for the pre-Rule8D period, whenever the issue of
section 14A arises before an Assessing Officer, he has, first
of all, to ascertain the correctness of the claim of the
assessee in respect of the expenditure incurred in relation to
income which does not form part of the total income under
the said Act. Even where the assessee claims that no
expenditure has been incuured (sic) in relation to income
which does not form part of total income, the assessing
officer will have to verify the correctness (sic) of such
claim. In case, the assessing officer is satisfied with the
claim of the assessee with regard to the expenditure or no
expenditure, as the case may be, the assessing officer is to
accept the claim of the assessee insofar as the quantum of
disallowance under section 14A is concerned. In such
eventuality, the assessing officer cannot embark upon a
determination of the amount of expenditure for the
purposes of section14A(1). In case, the assessing officer is
not, on the basis of objective criteria and after giving the
assessee a reasonable opportunity, satisfied with the
correctness of the claim of the assessee, he shall have to
reject the claim and state the reasons for doing so. Having
done so, the assessing officer will have to determine the
amount of expenditure incurred in relation to income which
does not form part of the total income under the said Act.
He is required to do so on the basis of a reasonable and
acceptable method of apportionment."
7. In spite of the said directions, Dr. Rakesh Gupta, ld. counsel
for the assessee, has submitted that there is no need to remit the
matter to the Assessing Officer as the Assessing Officer had not
ITA 92/2011 Page 9 of 11
made any disallowance under Section 14A, except in respect of
interest expenditure. He further says that the contention now raised
by the revenue does not emanate from the order of the Tribunal. We
are not inclined to accept the said contention. We have noted the
observations made by the Assessing Officer while making
disallowance under Section 14A. The Assessing Officer was
handicapped, because of failure of the assessee to furnish relevant
details and particulars while making the disallowance. It is clear
from the observations made by the Assessing Officer, in the
assessment order, that his intention was to segregate and compute the
disallowance to be made of expenses under Section 14A. We may
note that in the case of Maxopp Investment Ltd. (supra) also, the
issue raised was whether the interest paid on borrowed funds for
investing in shares for the purpose of acquiring and retaining a
controlling interest therein was allowable under Section 36(1)(iii)
and was not hit by Section 14A of the Act. We may, however,
clarify that the disallowance, if any, to be made by the Assessing
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Officer will not exceed the disallowance which was made in the
original assessment order as reduced by the CIT(Appeals).
8. In view of the said decision, we are inclined to pass an order of
remit to the Assessing Officer to examine the aforesaid aspects/ ratio
and, if required and necessary, compute the disallowance under
Section 14A. We may note that this order should not be construed as
an expression of opinion by this Court that some disallowance must
be made under Section 14A. The quantum, if any, has also not been
examined. The Assessing Officer will examine the said questions
keeping in mind the directions and ratio in the case of Maxopp
Investment Ltd. (supra). The question of law is accordingly
answered. We clarify that the Assessing Officer will not go into the
question of disallowance of interest. No costs.
SANJIV KHANNA, J.
R.V.EASWAR, J. FEBRUARY 28, 2012/vld ITA 92/2011 Page 11 of 11