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2015 Supreme(Del) 2588
IN THE HIGH COURT OF DELHI
S. MURALIDHAR And VIBHU BAKHRU, JJ.
CHEMINVEST LIMITED - Appellant
Versus
COMMISSIONER OF INCOME TAX-VI - Respondent
ITA 749/2014
Decided on : 02.09.2015
Mr Ajay Vohra, Senior Advocate with Ms. Kavita Jha and Mr. Vaibhav Kulkarni, Advocate.
Ms Suruchi Aggarwal, Senior Standing Counsel with Ms. Lakshmi Gurung, Advocate.
Section 14A of the Income Tax Act, 1961 does not apply if no exempt income is received or receivable during the relevant previous year.
Headnote:
Section 14A - Disallowance of Interest Expenditure - Income Tax Act, 1961 - Section 14A
Fact of the Case:
The Assessee appealed against the disallowance under Section 14A of the Income Tax Act, 1961 for the Assessment Year 2004-05, despite no exempt income being earned or received.
Finding of the Court:
The Court found that the interest expenditure incurred by the Assessee was for holding and maintaining strategic investments, and since no exempted income was earned, the disallowance under Section 14A was not applicable.
Issues: The main issue was 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.
Ratio Decidendi: The Court relied on the decision in CIT v. Holcim India (P) Ltd. and held that Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.
Final Decision: The impugned order of the ITAT was set aside and the appeal was allowed in favor of the Assessee.
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 28th 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 constitut
