Referred Sections:
Section 260A of the Income Tax Act
Section 14A
Section 78
Section 73,
Section 36(2)
$~41 & 42
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Order: 26.03.2019
+ ITA 1142/2018
+ ITA 1144/2018
PRINCIPAL COMMISSIONER OF INCOME TAX-6 ..... Appellant
Through: Mr.Asheesh Jain, Sr.Std.Counsel with
Mr.Sanjay Kumar, Jr.Std.Counsel
versus
NALWA SONS INVESTMENT LTD. ..... Respondent
Through: Mr.Ajay Vohra, Sr.Advocate with
Ms.Kavita Jha, Ms.Devika Jain &
Mr.Anant Mann, Advocates
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE PRATEEK JALAN
ORDER
%
S. RAVINDRA BHAT, (Open Court)
1. These two appeals are preferred by the revenue under Section
260A of the Income Tax Act ("the Act" hereafter); they challenge an
order of the Income Tax Appellate Tribunal ("ITAT") relating to two
assessment years concerning the assessee-respondent.
2. In ITA 1142/2018, three questions of law are urged (i) with
respect to the disallowance (under Section 14A) directed to be deleted
by the ITAT; (ii) the write-off of principal amount of bad debts,
which had been initially disallowed by the assessing officer (AO) and
the Commissioner (Appeals) (hereafter "CIT (A)") but set aside by
the ITAT; and (iii) the finding with respect to the speculative loss
recorded by the CIT(A), which was set aside by the ITAT. The
CIT(A) had substituted or rather modified the findings of the AO who
had brought to tax the entire loss amount of Rs. 73,54,155/-.
ITA No. 1142 & 1144/2018 Page 1 of 9
3. In ITA 1144/2018, solitary question is with respect to the
correctness of the ITATs findings with regard to the disallowance
under Section 14A.
4. The facts are that although the original entity i.e. Jindal Strips
Ltd. was engaged in multifarious activities, pursuant to the de-merger
and corporate restructuring process undertaken in 2004-2005, the
assessee, however, CONTINUED with the principal objective of
functioning as a non-banking financial institution, i.e. advancing
loans and engaging in investment activities. It reported a loss for
assessment year (AY) 2005-06, to the tune of Rs. 73,54,155/-. The
AO after due inquiry was of the opinion that this amount could not be
allowed as loss and added it back under Section 68, holding
transactions to be suspect.
5. The CIT(A) upon being approached in appeal, granted relief but
the Appellate Commissioner, however, held that though the veracity
of the transactions stood established, the assessee, had indulged in
speculative transactions and therefore, on operation of explanation to
Section 73, it is disentitled to the loss, and was rather entitled to set-
off the speculative loss against the speculative profit. The ITAT,
however, set aside the findings of the CIT(A) holding that the
assessee did not fit the description but was in fact "excepted" from the
operation of Explanation to Section 73.
6. The Revenue urges that ITATs findings on this question are
entirely erroneous and that the findings of the AO ought to be
accepted. It was also urged that the ITAT fell into error in holding
that there was no speculative loss; this argument was made on an
ITA No. 1142 & 1144/2018 Page 2 of 9
alternative basis.
7. At the outset, this Court notices that in the appeal preferred by
the Revenue before the ITAT, the findings of the CIT(A) with respect
to the veracity of the transaction were not challenged as is evident
from the following extract:
"Since Ld.CIT(A) accepted the genuineness of the
transactions of sale and purchase of shares in question
and his findings have not been challenged by the
Revenue in the Departmental appeal, therefore, we are of
the view that the assessee would be entitled for deduction
of loss. Thus, Ld.CIT(A) was unjustified to direct the AD
to allow loss as speculation loss u/s 73 of the Act. We
accordingly, set aside the orders of the authorities below
and delete the entire addition. In the result, this ground
of appeal of the assessee is allowed."
8. For the above reasons, this Court is of the opinion that the
Revenues argument with respect to the applicability of Section 68 ,
are unmerited.
9. As far as the findings of the CIT(A) regarding applicability of
Section 73 are concerned, this Court is satisfied that textually the
ITATs findings were warranted. The relevant provision of Section
73 i.e. explanation to Section 73 reads as follows:
"Explanation Where any part of the business of a
company [other than a company whose gross total
income consists mainly of income which is chargeable
under the heads "Interest on securities", "Income from
house property", "Capital gains" and "Income from
other sources"], or a company [the principal business of
which is the business of trading in shares of banking] or
the granting of loans and advances) consists in the
purchase and sale of shares of other companies, such
ITA No. 1142 & 1144/2018 Page 3 of 9
company shall, for the purposes of this section, be
deemed to be carrying on a speculation business to the
extent to which the business consists of the purchase and
sale of such shares.]"
10. A plain reading of the explanation clarifies that where any part
of the business of a company consists in the purchase and sale of
shares of other companies, it is deemed to be carrying on a
speculative business. In the present case, assessee falls within the
exception carved out in the part of the section, which is found in the
parenthesis ("other than a company whose gross total income consists
mainly of income which is chargeable under the heads "Interest on
securities", "Income from house property", "Capital gains" and
"Income from other sources", or a company [the principal business
of which is the business of trading in shares of banking or the
granting of loans and advances); its total income mainly consists of
income derived from the granting of loans and advances. Such being
the case, the CIT(A) clearly falls into error in holding that the loss
reported pertains to a speculative transaction; the ITAT acted
correctly in law in setting aside that finding. Therefore, no question
of law arises in this aspect.
11. As to the second question [in ITA 1142/2018], which is write-
off of the principal amount, this Court notices that the relief was
granted on interest. The AO disallowed the interest. Interestingly, the
assessee had not claimed write-off of the principal amount lent. In the
appeal, the assessee urged certain additional grounds including
claiming a write-off of bad debts. The CIT(A) did not allow this but
on the other hand allowed the write-off of interest.
ITA No. 1142 & 1144/2018 Page 4 of 9
12. On further appeal to the ITAT, the assessee succeeded. The
ITAT reasoned presumptively, that since the claim for interest had
been allowed in the past and was even granted in the current
assessment year, the assessee legitimately could claim the write-off as
bad debts even towards the principal. For doing so, the ITAT relied
upon the judgment of the Supreme Court in T.R.F. Limited v. CIT,
Ranchi (2010) 323 ITR 397 (SC); as well as judgment of this Court in
CIT v. IFCI Venture Capital (2009) 2 Taxmann.com 93 (Delhi). In
the latter judgment, i.e. IFCI Venture Capital (supra), this Court held
as follows:
"As per section 36(1)(vii), as amended with effect from
01.04.1989, the assessee is not required to establish that
the concerned debt has actually become bad in the
relevant year for the purpose of claiming deduction
under the section and the only requirement for claiming
this deduction is that the assessee has to write off the
relevant debts in its books of accounts treating the same
as bad.
In the instant case, there was a finding of fact by
the Tribunal that since the amount had been written off
in the accounts, the assessee was no more required to
prove whether the amount had become bad during the
year or not. The write off was bonafide.
Under the circumstances, the assessee was duly
entitled for deduction of the sum on account of bad debts
and there was no infirmity in the reasoning given by the
Tribunal on that point and, as such, no substantial
question of law arose for court's consideration and the
revenue's appeal was not maintainable."
13. As it is evident that the ITATs decision was based upon the
ruling of the Supreme Court and of this Court [especially IFCI
Venture Capital (supra)], no question of law arises that the assessee in
ITA No. 1142 & 1144/2018 Page 5 of 9
the first instance did not claim the write-off as a deduction per se that
does not stop it or preclude it from claiming relief, given the judgment
of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT,
(Central), Calcutta (1971) 82 ITR 363 (SC). Furthermore, this Court
is also of the opinion that Section 36(2) also applied to the facts and
circumstances of this case.
14. On the last question urged by the Revenue i.e. disallowance
under Section 14A, this Court notices that at the outset the period
when the disallowance was to be calculated- in both appeals, was
when there was no Rule 8D setting out the formula for calculating
disallowance, under Section 14A(3). The assessee had claimed that it
incurred no expenditure in earning dividend (i.e. tax exempt) income,
which constituted approximately 40% of its income. The AO rejected
its argument, and roughly apportioned about 9-10% of the exempt
income, which bore some proportion to the tax exempt income: for
instance, in AY 2005-06, the tax exempt income was Rs. 4.06 crores
and the disallowance by the AO (and the CIT (A)) was Rs.
36,35,873/-; for AY 2006-07, the tax exempt income was Rs. 6.50
crores and the disallowance calculated was Rs. 72.62 lakhs.
15. The tribunals reasoning for the first year, which prevailed in its
analysis for the second year, is as follows:
".. 7. We have heard the rival submissions. It is not a
dispute that Rule 8D is applicable from AY 2008-09. The
assessee submitted before the AO that it has not incurred
any expenditure for earning the dividend income. The AO
has also noted in the assessment order that no interest
element is involved on transaction. The assessee also
submitted before the authorities below that investments
ITA No. 1142 & 1144/2018 Page 6 of 9
were existing since 1998 and has come to the assessee
upon demerger. The AO has not disputed the contention
of the assessee. The AO should have considered the
explanation of the assessee in proper prospective as
regards the other expenditure also on which the assessee
claimed that same were not incurred for earning any
dividend income....
In the case of CIT vs Abhishek Industries Ltd. [2016]
380ITR 652 (P&H) by the Punjab & Haryana High
Court held as under:-
"Section 14A of the Income-tax Act, 1961,
empowers an Assessing Officer to disallow
expenditure in relation to exempted income from
shares if interest bearing funds have been used by
the assessee. Section 14A may only be invoked if
the assessee has made investments in purchase of
shares out of borrowed funds. As a consequence, if
the assessee has invested his own money in
purchase of shares, there is no question of
disallowance under section 14A. Section 14A
requires the Assessing Officer to record
satisfaction that interest bearing funds have been
used to earn tax-free income. The satisfaction to
be recorded must be based upon credible and
relevant evidence. The onus, therefore, to prove
that interest bearing funds were used, lies squarely
on the shoulders of the Revenue. Thus, if the
Assessing Officer is able to refer to relevant
material while recording satisfaction that
borrowed funds were used to earn interest-free
income as opposed to the assessee's own funds, the
Assessing Officer may legitimately disallow such a
claim. The Assessing Officer, however, cannot, by
recording general observations, particularly
where the assessee has denied using interest
bearing funds, proceeds to infer that interest-
bearing income must have been used to earn
exempted income. Section 14A, being in the nature
of an exception must be construed strictly and only
ITA No. 1142 & 1144/2018 Page 7 of 9
where the assessing officer records satisfaction, on
the basis of clear and cogent material, shall an
order be passed under section 14A disallowing
such a claim. The assessee made a categorical
submission of fact before the Assessing Officer
that no interest bearing funds had been diverted to
make investments leading to tax exempt income.
The Assessing Officer, under section 14A read
with rule 3D of the Income-tax Rules, 1962,
disallowed expenditure in respect of the dividend
earned by the assessee holding that interest
bearings funds had been used to earn tax-free
dividend. The Commissioner (Appeals) held that
the Revenue had not been able to prove that
interest bearing funds were used. This was
confirmed by the Tribunal holding that as the
Assessing Officer had failed to prove that interest
bearing funds were used, it would not invite
disallowance under section 14A. On appeal: Held,
dismissing the appeal, that as there was no
tangible material on record that could have
enabled the Assessing Officer to record
satisfaction in terms of section 14A the findings
recorded by the Commissioner (Appeals) and the
Tribunal that the Assessing Officer had failed to
discharge this onus were neither perverse nor
arbitrary and, therefore, did not call for
interference."
8. Considering the facts of the case and in the
absence of any satisfaction recorded by the AO, no
disallowance should have been made by the authorities
below. The assessee claimed that no expenses have been
incurred for earning dividend income and investments
were existing since 1998 and further admittedly no
interest element is involved to earn dividend income
would show that no borrowed funds have been used for
making investment. If AO was not satisfied with the
explanation of the assessee, he should have brought some
material on record to disbelieve the explanation of the
assessee. He should record his satisfaction as to how the
ITA No. 1142 & 1144/2018 Page 8 of 9
explanation of the assessee was unreasonable and
unsatisfactory. In the absence of any evidence on record,
disallowance made by the AO is not sustainable. We,
accordingly, set aside the orders of the authorities below
and delete the addition. This ground of appeal of the
assessee is allowed."
16. Apparently, during the year (AY 2005-06), the total
expenditure incurred was about Rs. 90 lakhs. During the hearing, the
break-up of these expenses was revealed: about Rs. 2.5 lakhs was
spent on salaries; the rest was on professional fees (including legal
fees) transport, maintenance of vehicles, stationery, postage, printing
etc. It was within the power of the AO to have inquired into these
items, to scientifically apportion amounts attributable to expenditure
that could reasonably bear proximity with earning of tax exempt
income; instead, the AO merely rested content with applying a
proportion, which was not appropriate. Given that the funds and scrips
(which yielded dividend) were legacy assets, the assessees arguments
were reasonable.
17. For the above reasons, in both assessment years, the question
relating to disallowance under Section 14A does not arise.
18. As a result of the above discussion, no substantial question of
law arises for consideration. The appeals are, therefore, dismissed.
S. RAVINDRA BHAT, J
PRATEEK JALAN, J
MARCH 26, 2019
,,hkaur /pkb
ITA No. 1142 & 1144/2018 Page 9 of 9
|
