THE issues before the Tribunal are - Whether when assessee receives dividend both from foreign and domestic companies, interest expenditure incurred can be averaged and disallowed in terms of section 14A to the proportion of dividend income received from domestic companies, even though investement in shares were out of substantial free reserves and not from borrowings and Whether provisions of Sec 14A are not applicable to expenditure incurred to earn dividend income from investments in foreign companies. And the verdict goes in favour of the assessee.
Facts of the case
Assessee claimed dividend income of Rs.33,06,831 as exempt u/s 10(33) of the Act. The AO observed that the expenditure
incurred for earning such exempt income was disallowed in terms of section 14A. On being called upon to explain as to why the interest expenditure on investment in shares should not be disallowed under this section, the assessee submitted an explanation to the effect that it had opening reserves and share capital to the extent of Rs.151.68 crore, as against which it had made investment during the previous year relevant to the assessment year only to the extent of Rs.61.25 crore. The other balance sheet figures were also put forth before the A.O. to bring home the point that no disallowance was called for u/s 14A. The AO noticed that the total interest expenditure incurred by the assessee was to the tune of Rs.19.41 crore. By considering the total amount of interest bearing borrowings, the AO worked out average rate of interest at 13.63%. Such rate was applied to the investments made by the assessee in shares for working out disallowance at Rs.6,38,37,708. The CIT(A) observed that only the dividend income received from a domestic company was exempt u/s 10(33) of the Act. As the assessee had invested in equity shares of three foreign companies, the interest in relation to investment in the shares of such foreign companies was not liable to be considered u/s 14A. It was still further noted that the assessee had invested in three domestic companies which totalled to Rs.2.84 crore. He determined average rate of interest at 6.20%. The said percentage was applied on the total investment of Rs.2.84 crore for sustaining the disallowance at Rs.17,66,427. Therefore, both the sides have filed cross appeals before the Tribunal.
Having heard the parties, the Tribunal held that,
++ section 14A(1) provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Section 10(33), at the material time, exempted inter alia dividend referred to in section 115-O from the purview of taxation. Section 115-O talks of a 'domestic company’. A 'domestic company’ has been defined u/s 2(22A) to mean 'an Indian company or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangement for the declaration and payment, within India, of the dividend (including dividends on preference shares) payable out of such income.’ A bare perusal of the definition of 'domestic company’ transpires that it is only Indian company or any other company, which in respect of its income is liable to tax under this Act, has made prescribed arrangement for the declaration and payment of dividend. Obviously this definition does not extend to foreign companies. As such the disallowance u/s 14A is conceivable in respect of investment made in the shares of domestic companies and not foreign companies. No material has been brought on record by the DR to controvert the finding recorded by the CIT(A) in respect of the companies referred to in the impugned order as foreign companies. In view of these facts, it becomes apparent that the provisions of section 14A cannot extend to investments made in the shares of such foreign companies. To this extent we uphold the impugned order;
++ coming to the assessee’s objection about the sustainability of part of disallowance u/s 14A, we observe that total investments made in the shares of domestic company is to the tune of Rs. 2.84 crore. It is palpable that the assessee made investments in shares of Dena Bank in financial year 1996- 1997. Investment in Kothari Pioneer Infotech and Kothari Pioneer Blue Chip Fund was made in the previous year ending 31.03.2000. It shows that no fresh investment was made by the assessee during the current year in the shares of these companies. The assessee’s annual accounts for the current and also the earlier relevant years are available. Out of the total investments of Rs. 2.84 crore, the assessee had made investment in shares of Dena Bank to the tune of Rs.12.57 lakh, thereby leaving remaining investment of Rs. 2.72 crore made in the year ending 31.03.2000 in the shares of Kothari Pioneer Infotech and Kothari Pioneer Blue Chip Fund. A close look at the Profit and loss account of the assessee-company for the corresponding date of 31.03.2000 divulges that the assessee earned profit for the said year amounting to Rs.24.56 crore. The amount of depreciation itself for that year stands at Rs. 6.07 crore which is a non-cash item. When we consider the magnitude of profit with the company and the investments made in these shares of Kothari group, it can be easily noticed that the profit for the relevant year itself was much more than the amount of investment. Coming to the investments in the shares of Dena Bank in financial year 1996-1997 it is observed that the share capital of the company far exceeds the amount of investment in shares as at the end of such financial year. The jurisdictional High Court in the case of CIT v. Reliance Utilities and Power Ltd. has held that if there be interest free funds available to the assessee sufficient to meet its investments and at the same time loan has been raised, it can be presumed that the investments were made from interest free funds. While reaching this conclusion the jurisdictional High Court considered the judgment of the Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT. In view of the aforesaid precedent of the jurisdictional High Court, it is apparent that no interest bearing funds can be said to have been deployed by the assessee for the purposes of making investment in the shares of these three companies, from which exempt dividend income was earned. It is axiomatic that where investment is made out of assessee’s own funds and not out of borrowed funds, there can be no disallowance u/s 14A. Our view is fortified by the judgment of the jurisdictional High Court in the case of CIT v. K.Raheja Corporation Pvt. Ltd.,. In view of the foregoing discussion, we are of the considered opinion that the CIT(A) was not justified in sustaining the disallowance at Rs.17.65 lakh u/s 14A in respect of the investments made by the assessee in the shares of three domestic companies. The ground raised by the assessee is allowed and that of the Revenue is dismissed.
No comments:
Post a Comment