CIT v. Gujarat State Fertilizers & Chemicals Ltd.

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The Tax PublishersTax Appeal No. 126 of 2013 arising out of order of Tribunal, dt. 13-7-2012 2013 TaxPub(DT) 2220 (Guj-HC) : (2013) 358 ITR 0323 : (2013) 217 TAXMAN 0229 Income Tax Act, 1961 --Business expenditure--Disallowance under section 14A Owned fund more than borrowed fund--As assessee's own fund was more than borrowed fund for investment made in securities 10 per cent of interest on borrowed fund could not be disallowed out of dividend income which was exempt from taxation and as such, same could not be added while computing book profit under section 115JB. It can be said that the object behind insertion of section 14A is amplified by the Supreme Court in the case of CIT v. Walfort Share & Stock Brokers (P.) Ltd. 2010 TaxPub(DT) 2087 (SC) : (2010) 326 ITR 1 (SC), 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 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. [Para 3.6] However, when both the Commissioner (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 under section 14A in respect of interest expenditure. When the very basis for employing section 14A 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 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.1,14,43,040. [Para 3.8] Needless to specify at this stage that when from the facts that have emerged from record, the employment of section 14A 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. [Para 3.10] There is no fault in the approach adopted by both the authorities. The addition under section 115JB of a sum of Rs. 1,14,43,040 when was made as an expenditure estimated on earning of dividend income under section 14A, without reiterating the rationale of confirming deletion of such amount as has been elaborately done at the time of deciding question, this deletion requires to be confirmed. [Para 6] Income Tax Act, 1961 Section 14A Income Tax Act, 1961 Section 115JB Income Tax Rules, 1962 Rule 8D Income Tax Act, 1961 --Capital or revenue expenditure--Corporate debt restructuring (CDR) expenses Waiver of interest--Where assessee incurred expenditure on payment to financial consultants, who negotiated with banks and financial institutions in connection with scheme of corporate debt restructuring, for waiver of interest, same was not capital expenditure but revenue in nature. Further, principal amount of loan waived off was not taxable under section 28(iv) or section 41(1) as there had been no allowance or deduction of such amount in any preceding year. SUBSCRIBE FOR FULL CONTENT

The Tax PublishersTax Appeal No. 126 of 2013 arising out of order of Tribunal, dt. 13-7-2012
2013 TaxPub(DT) 2220 (Guj-HC) : (2013) 358 ITR 0323 : (2013) 217 TAXMAN 0229

Income Tax Act, 1961

--Business expenditure--Disallowance under section 14A Owned fund more than borrowed fund--As assessee's own fund was more than borrowed fund for investment made in securities 10 per cent of interest on borrowed fund could not be disallowed out of dividend income which was exempt from taxation and as such, same could not be added while computing book profit under section 115JB.

It can be said that the object behind insertion of section 14A is amplified by the Supreme Court in the case of CIT v. Walfort Share & Stock Brokers (P.) Ltd. 2010 TaxPub(DT) 2087 (SC) : (2010) 326 ITR 1 (SC), 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 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. [Para 3.6] However, when both the Commissioner (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 under section 14A in respect of interest expenditure. When the very basis for employing section 14A 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 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.1,14,43,040. [Para 3.8] Needless to specify at this stage that when from the facts that have emerged from record, the employment of section 14A 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. [Para 3.10] There is no fault in the approach adopted by both the authorities. The addition under section 115JB of a sum of Rs. 1,14,43,040 when was made as an expenditure estimated on earning of dividend income under section 14A, without reiterating the rationale of confirming deletion of such amount as has been elaborately done at the time of deciding question, this deletion requires to be confirmed. [Para 6]

Income Tax Act, 1961 Section 14A

Income Tax Act, 1961 Section 115JB

Income Tax Rules, 1962 Rule 8D

Income Tax Act, 1961

--Capital or revenue expenditure--Corporate debt restructuring (CDR) expenses Waiver of interest--Where assessee incurred expenditure on payment to financial consultants, who negotiated with banks and financial institutions in connection with scheme of corporate debt restructuring, for waiver of interest, same was not capital expenditure but revenue in nature. Further, principal amount of loan waived off was not taxable under section 28(iv) or section 41(1) as there had been no allowance or deduction of such amount in any preceding year.