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Judgment
Sonia Gokani, J.—Aggrieved by the order of the Income Tax Appellate Tribunal, Ahmedabad (hereinafter referred to as ''the Tribunal'') dated July 13, 2012, the present Tax Appeal is preferred by the Revenue u/s 260A of the income tax Act, 1961 (hereinafter referred to as ''the Act''), proposing the following substantial questions of law for our consideration:
(I) Whether on the facts and circumstances of the case, the Appellate Tribunal was right in law in restricting the addition u/s. 14A of the Act towards interest and other expenses incurred in relation to exempted income of dividend on ad hoc basis of 9.18 crore being 10% of the total income to Rs. 5 lacs without appreciating that the assessee was maintaining mixed funds and failed either to furnish day-to-day cash flow statement or to establish that it had its own surplus funds for investment in dividends?
(II) Whether on the facts and circumstances of the case, the Appellate Tribunal was right in directing to allow corporate debt restructuring expenses of 2.57 crore on payment to financial consultants in connection with waiver of loans, by spreading it over a period of 6 years disregarding the fact that such expenditure in relation to capital assets constitutes capital expenditure, which is specifically excluded in section 37(1) of the Act?
(III) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in directing to exclude the waived amount of 60.13 crore out of the principal loans, from the total income, disregarding the inclusive definition of income u/s. 2(24) and the profits and gains business in section 28 and the ratio settled in the landmark decision in the case of Commissioner of Income Tax, Madurai Vs. T.V. Sundaram Iyengar and Sons Ltd., holding that waiver of such loans received in the course of business constitutes income receipt on being written off, by virtue of section 28(1) itself?
We have exhaustively heard Shri K.M. Parikh, learned counsel appearing on behalf of Revenue and Shri Manish J. Shah, learned counsel appearing on behalf of respondent-Assessee and with their assistance examined the orders of the Revenue authorities and other material brought on record.
The first question concerns disallowance made by the Assessing Officer of the sum of Rs. 91.80 lakh u/s 14A of the Act towards interest and other expenses incurred in relation to exempted income of dividend. The Assessing Officer on the ground that the respondent-assessee utilised the interest bearing borrowed funds for non-business purpose disallowed such expenses to the tune of 10% of the dividend income. The Assessing Officer was of the opinion that the onus was not discharged by the respondent-assessee to establish that the investment made which earned dividend which has been received during the Assessment Year 2004-2005, was out of its own funds and no borrowed funds have been utilised for making such investment on the basis of cash/fund flows statement. And, therefore, on estimated basis, it deducted 10% of the total dividend income as expenditure including the interest in relation to earning of exempt income and the sum of Rs. 91.80 lakh was disallowed as per the provision of Section 14A of the Act.
2.1 Being aggrieved by such decision, the respondent-assessee moved the CIT (Appeals). The CIT (Appeals) dealt with the issue in the following manner:
I have considered the rival submissions. It is noted that the Assessing Officer has assumed that the assessee must have incurred other incidental expenses to earn the dividend income. On the other hand, the appellant has categorically maintained that it has not incurred any expenditure for the earning of dividend income. It is also seen that the Assessing Officer has failed to identify and show the particular expenses recorded in the books of account which have been incurred by the appellant towards earning of the exempt dividend income. In these circumstances, the decision of the Hon''ble Delhi HAT in the case of (2006) 101 TTJ 369 squarely applies. The Hon''ble ITAT have observed that the word "incurred" used in section 14A clearly implies that it must be shown as a fact that some expenditure was in fact incurred by the assessee to produce exempted income. Under sec. 14A the Assessing Officer has no power to estimate the expenditure which the assessee would have, in the opinion of the Assessing Officer, incurred in relation to the exempted income. Furthermore it seems implicit in the expression "in relation to" used in the section the concept that the Assessing Officer should be in a position to pinpoint, with an acceptable degree of accuracy, the expenditure which was incurred by the assessee to produce non taxable income. The word "incurred" signifies that the expenditure must have been actually incurred, not notionally. The Hon''ble ITAT further held that it followed from this that it was the duty of the Assessing Officer to pinpoint such expenditure on the basis of the material on record. The language of the section does not relieve the Assessing Officer of the burden of proving, on the basis of evidence or material on record that the assessee has in fact incurred expenditure which has relation to the exempted income. Relying on the decision of the Hon''ble Delhi ITAT which squarely covers the facts of the appellant''s case, it is held that the Assessing Officer has failed to clearly show that any particular expenditure was incurred by the appellant to earn the exempt dividend income. Under the circumstances, the ad hoc disallowance made of Rs. 91,80,000/- u/s. 14A of the Act is cancelled.
2.2 The Revenue challenged this ground before the Tribunal. The Tribunal was of the firm opinion that the respondent-assessee''s own funds were higher than the investment made by the respondent-assessee and, therefore, it was not possible to hold that the interest bearing funds were diverted for making investment in shares and, therefore, u/s 14A of the Act, it held that there was no question of disallowance in respect of interest expenditure. For other expenses, the request was made for restoring the matter back to the Assessing Officer, however, the respondent-assessee with a view to put an end to the entire dispute had agreed with disallowance of Rs. 5 lakh, which according to the Tribunal was meeting the ends of justice and, therefore, the Tribunal had confirmed disallowance of Rs. 5 lakh in respect of administrative expenses.
2.3 The learned counsel Shri K.M. Parikh appearing on behalf of Revenue has vehemently submitted before us that in absence of any material to indicate that the assessee had discharged his burden of establishing that it had interest free funds available with it, the Tribunal''s finding requires interference. He also urged this Court that as far as the calculation is concerned, in the Assessment Year 2004-2005, the Rule 8D which has come into being subsequently and it being prospective in nature, the authorities ought to have considered the judgment of the Delhi High Court while calculating such expenses. He has relied on the decision of the Delhi High Court in the case of Commissioner of Income Tax Vs. Ms. Sushma Kapoor, wherein the assessee had taken a loan from the bank on which she paid interest of huge amount, but she had also granted interest-free advances. The Assessing Officer held that there was no business transaction to those whom the assessee gave loan and he disallowed the proportionate interest which had been paid by the assessee, to the bank. The Tribunal held that to the extent, it could be proved that investment was made from the borrowed funds, the expenses had been rightly disallowed u/s 14A of the Act. When the Revenue carried it in appeal, the High Court dismissed it on the ground that the issues raised by the Revenue were factual in nature where findings of facts were recorded in favour of the assessee. The Court also held that the investment was made in the preceding year and no part of the investment was correlated with the borrowed funds.
2.4 The Delhi High Court in the case of Maxopp Investment Ltd. Vs. Commissioner of Income Tax, New Delhi, , was examining the provision of Section 14A of the Act and sub-rule (2) of Rule 8D qua the method for determining the expenditure in relation to exempt income. It held thus:
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. So, even for the pre-Rule 8D 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 incurred in relation to income which does not form part of total income, the Assessing Officer will have to verify the correctness 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 u/s 14A is concerned. In such eventuality, the Assessing Officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(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.
2.5 Per contra, the learned counsel Shri Manish Shah appearing on behalf of respondent-assessee has submitted that there would not arise any question of deduction of any expenditure incurred/in relation to the income under total income, nor would arise the question of applying method for determining, the amount of expenditure in relation to the income not includable in total income under Rule 8D. He has also argued that this Court has already held following Bombay High Court that Rule 8D is prospective in nature and even otherwise considering the availability of funds with the respondent-assessee, this provision would not have any applicability.
2.6 On thus having heard both the sides, it can be said that the object behind insertion of Section 14A is amplified by the Supreme Court in the case of Commissioner of Income Tax, Mumbai Vs. Walfort Share and Stock Brokers P. Ltd., which clarifies that the expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In absence of Section 14A, the expenditure incurred in respect of exempt income was also being claimed against taxable income and such practice since was to be curbed, Section 14A has been inserted. It is clarified that sub-section (1) of Section 14A of the Act clearly stipulates that for the purpose of computing total income under Chapter IV, no deduction is permissible in respect of the expenditure incurred in relation to the income which does not form part of the total income under the said Act.
2.7 In the case of an income, like dividend income, which does not form part of the total income, any expenditure incurred by the assessee in relation to such non-taxable income, the claim of deduction of such expenses incurred cannot be allowed.
2.8 The moot question here is as to whether the CIT (Appeals) and the Tribunal were right in setting aside the order of Assessing Officer, whereby it disallowed the sum of Rs. 91.80 lakh, applying the provisions of Section 14A of the Act on the ground that the assessee had used interest bearing borrowed funds for earning dividend during the assessment year under question. The dividend income earned was of Rs. 9.8 crore and the estimate of expenditure was assessed at the rate of 10% of the total income. Had the Revenue been successful in establishing that the assessee had incurred the expenses to earn the dividend income from the borrowed funds, the entire discussion of application of Section 14A of the Act could be understood. However, when both the CIT (Appeals) and the Tribunal have noted that the assessee had sufficient funds available with it, which was more than the amount it invested for earning the dividend income, both these authorities have correctly approached the issue by setting aside the order of disallowance u/s 14A of the Act in respect of interest expenditure. When the very basis for employing Section 14A of the Act on factual matrix is lacking, the disallowance to the extent of 10% of dividend income was not permissible. When it transpires from record that the assessee''s own funds were at higher than the investment made by it and with nothing to indicate that the borrowed funds were utilised for the purpose of investment in shares and for earning dividends, the Tribunal committed no error in disallowing the sum of Rs. 91.80 lakh.
2.9 As far as other administrative expenses are concerned, the Revenue had requested to restore the matter back to the Assessing Officer. However, to put an end to the entire dispute with regard to other expenses, the assessee permitted disallowance of Rs. 5 lakh. The Tribunal considering the volume and quantum of investment disallowed the said amount of Rs. 5 lakh, which though is on estimated basis, it is a reasonable base and, therefore, the first question merits no consideration.
2.10 Needless to specify at this stage that when from the facts that have emerged from record, the employment of Section 14A of the Act is not found correct, there does not arise any question of determining the amount of expenditure in absence of Rule 8D, on the basis of reasonable and acceptable method of apportionment as pressed into service by the Revenue basing on the judgment of the Delhi High Court.
Insofar as the second question is concerned, it pertains to Corporate Debt Restructuring (hereinafter referred to as ''the CDR'') expenses of Rs. 2.57 crore on payment to financial consultants in connection with waiver of loans, the Assessing Officer noted that the respondent-assessee paid the sum of Rs. 2.57 crore to the financial consultant M/s. Brescon Corporate Advertisers Ltd., who provided their professional services in connection with the scheme of CDR by negotiating with the banks and financial institutions, which eventually helped the reduction of interest burden of the assessee. They were claimed to be the revenue expenditure aimed at reduction of recurring revenue expenditure of interest. The Assessing Officer held that the assessee would derive benefit of enduring nature as a result of CDR exercise and, therefore, it was of the opinion that all the expenses are to be treated as capital expenditure and the same were needed to be disallowed and added to the income of the assessee. The Assessing Officer relied upon the decision of the Supreme Court in the case of India Cements Ltd. Vs. Commissioner of Income Tax, Madras, and dismissed the plea of the assessee.
In the case of India Cements Ltd (supra), appellant had obtained a loan from Industrial Finance Corporation securing charge on its fixed assets. For doing so, it incurred expenses of registration fees, stamp duty, lawyer''s fees etc. and claimed the said amount as business expenditure. It was held by the Apex Court that "the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessees business and was therefore allowable as a deduction u/s 10(2)(xv) of the Indian income tax Act, 1922. The act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider the object with which the loan was obtained."
3.1 The assessee on being aggrieved by such order traveled to the CIT (Appeals), which considered this issue in detail. It noticed that the amount of Rs. 60.13 crore had been waived under the CDR and interest had also been reduced for the financial year 2003-2004. The CIT (Appeals) on discussing various case laws held that the same cannot be considered to be having any enduring benefits.
3.2 The Tribunal on this very issue relied on the decision of the M/s. Madras Industrial Investment Corporation Ltd. Vs. The Commissioner of Income Tax, Tamil Nadu-I, Madras, wherein the similar question had arisen, whereby the Supreme Court decided whether a particular expenditure was revenue expenditure incurred for the purpose of business or capital in nature. It held that such question needs to be determined on consideration of all the facts and circumstances of the case and by application of principle of commercial trading. While holding the expenditure as revenue in nature, it spreaded the same over a period. The Tribunal further held that:
We have considered the rival submissions, perused the materials on record and gone through the orders of authorities below and various judgments cited by ld. AR of the assessee. We find that Ld. CIT(A) has decided this issue in favour of assessee by following these very judgments of Hon''ble Apex Court which are cited by the Ld. AR of the assessee before us and considering the facts of the present case, we do not find any good reason to interfere in the order of Ld. CIT(A) on this issue. We therefore decline to interfere in the order of Ld. CIT(A) on this issue. This ground of Revenue is also rejected.
3.3 In the present case also, the CDR expenses to the tune of Rs. 2.57 crore have been rightly held by both the CIT (Appeals) and the Tribunal as revenue in nature and the same has rightly not been held to be capital in nature. For the waiver of the loan, the payment has been made to the financial consultants. This was for the purpose of business and the same was held to be allowable u/s 37(1) of the Act. Having held the said amount to be revenue in nature applying the decision of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra), when the amount has been spreaded over a period of six years, no error is committed by both the authorities. Once the expenditure is held to be revenue in nature incurred wholly and exclusively for the purpose of business, it can be allowed in its entirety in the year in which it is incurred. However, considering the decision in the case of Madras Industrial Investment Corpn. Ltd. (supra), when the spreading is done for over a period of six years and as the assessee-respondent has no objection to such revenue expenditure being spread out, though it could have insisted for this amount to be allowed in the year under consideration, with no such objection having been raised, the Revenue would not succeed in this issue as the expenditure is held to be revenue in nature. Thus, the second question also does not merit any consideration.
The third question pertains to excluding the waived amount of Rs. 60.13 crore out of the principal loans. What is found is that the Assessing Officer dismissed the claim of the respondent-assessee of Rs. 60.13 crore as a capital receipt essentially on two grounds. Firstly that the waiver of the principal amount of loan had made assessee richer by that amount and secondly, the liability to pay had seized. Therefore, this being a benefit or perquisite arising from the business, this has to be construed as an income u/s 28(iv) of the Act. A strong reliance was placed by the assessee on the decision of this Court rendered in the case of Commissioner of Income Tax Vs. Chetan Chemicals Pvt. Ltd., Assessing Officer, however, relied on the decision in the case of Commissioner of Income Tax, Madurai Vs. T.V. Sundaram Iyengar and Sons Ltd., wherein the Apex Court held:
If an amount is received in the course of a trading transaction, even though it is not taxable in the year of receipt as being of revenue Character, the amount changes its character when the amount becomes the assessee''s own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee.
4.1 In the case of Chetan Chemicals (P.) Ltd. (supra), during the course of his business of inorganic chemicals assessee procured unsecured loans from various creditors. Due to financial crunch of the company, the creditors arrived at a compromise before the competent court and they remitted the unsecured loans amounting to Rs. 1.77 lakh along with interest that had accrued in its favour. The interest was an income liable to tax but not the remission of loan. This loan amount was taxed by invoking provisions of Section 28(iv) of the Act. The Tribunal held in favour of the assessee. On reference, this Court upheld the version of the Tribunal by holding:
It was an admitted position that there had been no allowance or deduction in any of the preceding years and, hence, there was no question of applying the provision as such. Section 28 of the Act deals with profits and gains of business or profession and clause (iv) thereof says that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable as income under head ''Profits & Gains of business or profession''.
4.2 As the assessee company was not found to be carrying on the business of obtaining loan, the Court held that the remission of such loan by the creditors was a benefit arising out of such business and, therefore, such remission of unsecured loan was not taxable at the ends of the assessee.
4.3 The CIT (Appeals) held in favour of the assessee by holding thus:
It is observed that it is not the Assessing Officer''s case that any deduction has been allowed in respect of the loans in question in any earlier year. In the given facts and circumstances of the case it cannot also be said that the appellant was carrying on business of obtaining loans. Therefore, it could not be said that the remission of such loans was a benefit arising from such business. In view of these undisputed facts, the decision of the Gujarat High Court in the case of Chetan Chemicals Pvt. Ltd. (supra) squarely applies. Further, it is observed that the decision in the case of Helios Food Improvers Pvt. Ltd. (supra) also fully applies to the facts of the appellant''s case. In view of these circumstances, I am convinced that the amount of loans of Rs. 60.13 crore waived by the financial institutions cannot be brought to tax as income u/s. 28(iv) r.w.s. 41(1) of the IT Act. The addition so made of Rs. 60.13 crore is, therefore, cancelled.
4.4 This issue was carried to the Tribunal. The Tribunal also concurred with the findings of the CIT (Appeals) in the following manner:
We have considered the rival submissions, perused the materials on record and gone through the orders of authorities below. We find that in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra) the issue involved was regarding an amount received in the course of trading transaction even though it was not taxable in the year of receipt as being of revenue character. This dispute in that case was regarding credit balance outstanding in the name of customer of the assessee. Under these facts, it was held by Hon''ble Apex Court in that case that since amount in question was received in course of business transaction, the same is taxable when the liability seized to exist. In the present case, the facts are different. The amount was not received in the course of business like advance from customers. It was a loan taken and benefit has arisen because of restructuring of loan in which part amount of principle loan was waived. Therefore, this judgment of Hon''ble Apex Court in the case of T.V. Sundaram Iyengar & Sons Ltd (supra) cited by Ld. DR is not applicable in the present case, whereas the judgment cited by Ld. AR of the assessee of Hon''ble jurisdictional High Court rendered in the case of Chetan Chemicals (P.) Ltd (supra) is squarely applicable, wherein it was held that if the assessee is not carrying money lending business and earlier the loan do not give a benefit arising out of business than remission of the same cannot be taxed u/s. 41(1) of the Act or u/s. 28(iv) of the Act. Respectfully following this judgment of Hon''ble jurisdictional High Court rendered in the case of Chetan Chemicals (P.) Ltd (supra), we decline to interfere in the order of Ld. CIT(A) of this issue also. This ground of Revenue''s appeal is also rejected.
4.5 On thorough examination of the issue, we are of the firm opinion that the issue is squarely covered by the decision of this Court rendered in Chetan Chemicals (P.) Ltd. (supra). In the present case, the facts are almost identical and, therefore, the CIT (Appeals) and the Tribunal have rightly held in favour of the respondent-assessee. No error is committed requiring any indulgence from this Court.
Resultantly, no question of law much less any substantial question of law arises and the present Tax Appeal is, accordingly, dismissed.