PCIT Vs Ashok Apparels Pvt. Ltd. (Bombay High Court)
These appeals arose from a common background and were heard and disposed of together, with the Bombay High Court referring to the facts of Income Tax Appeal No. 1521 of 2017. The Revenue challenged the Tribunal’s treatment of two issues: disallowance under Section 14A of the Income-tax Act, 1961 and the character of bonus shares received in respect of shares held as stock-in-trade. On the first issue, for Assessment Years 2006-07, 2008-09 and 2009-10, the Tribunal found that the assessee had surplus/interest-free funds exceeding the investments made for earning exempt income and therefore deleted the interest disallowance under Section 14A.
The Tribunal relied on the Bombay High Court decisions in Commissioner of Income-Tax Vs. Reliance Utilities and Power Ltd. and Commissioner of Income Tax Vs. HDFC Bank Limited. For Assessment Year 2007-08, where investments exceeded interest-free funds by Rs.11,67,88,228/-, the Tribunal directed that the disallowance be computed with reference to that excess but restricted to exempt income of Rs.25,27,123/-. The High Court held that the Tribunal correctly applied the presumption that where sufficient interest-free funds are available, investments are presumed to have been made out of such funds.
The Revenue’s contention that the assessee had to demonstrate that only interest-free funds had actually been used was rejected; once the presumption operated, the burden was on the Revenue to establish otherwise, which it had not done. On the second issue, the Revenue contended that bonus shares received against original shares held as stock-in-trade must automatically have the same character. The High Court rejected this contention. Following the Supreme Court’s decision in Commissioner of Income-Tax, U.P. Vs. Madan Gopal Radhey Lal, the Court held that bonus shares do not automatically become stock-in-trade merely because they are accretions to shares held as stock-in-trade.
