Case Law Details
Case Name : Cheminvest Ltd. Vs CIT (Delhi High Court)
Appeal Number : ITA 749/2014
Date of Judgement/Order : 02/09/2015
Related Assessment Year :
Suraj R. Agrawal
Brief – Delhi High Court held in the case of Cheminvest Ltd. v. CIT that No disallowance u/s 14A can be made in a year in which no exempt income has been earned or received by the assessee. Section 14A of Income Tax Act, 1961 does not apply to shares bought for strategic purposes.
Facts of the case:
- The Appellant is engaged in the business of making investment in shares and accepting/granting of loans.
- The Assessee is one of the co-promoters of Max India Ltd.
- In the AY in question, the Appellant borrowed funds on which interest expenditure of Rs.1,21,03,367/- was incurred.
- The factual assertion of the Appellant, which has not been controverted, is that in the relevant AY no dividend income was earned by the Appellant from the amount invested in various shares.
- For the AY in question, the Appellant filed a return of income declaring a loss of Rs.13,84,086/-.
- This case was picked up for scrutiny and the Assessing Officer (AO) completed the assessment under Section 143(3) of the Act disallowing Rs.97,87,570/- out of the total expenditure incurred during the year under Section 14A of the Act.
- The reason recorded by the AO for this disallowance was that the borrowed funds were utilized for the purpose of purchase of shares for the purpose to earn dividend income which is exempted under section 10(33) of the Act and thus, not forming a part of the total income, and therefore the interest paid thereon had to be disallowed under Section 14A.
Issue put before Delhi High Court:
“Whether disallowance under Section 14A of the Act can be made in a year in which no exempt income has been earned or received by the Assessee?”
Contentions of Appellant:
- Where shares were held as business investment, the dividend income though assessable to tax under the head „income from other sources,‟ would retain its character as business income for all intents and purposes.
- The income from securities which forms part of the Assessee’s trading assets or part of its income in business if loss incurs in business would be set off against that income in succeeding years.
- The decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is „for the purpose of making or earning such income‟. Section 14A of the Act on the other hand contains the expression „in relation to income which does not form part of the total income.
Contention by Revenue:
- When the expenditure of interest is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not. Section 14A does not envisage any such exception.
- This is even if the interest paid on borrowings for the purchase of share were allowable u/s 57 as an expenditure incurred for earning or making income as held by the Supreme Court in the case of Rajendra Prasad Moody (supra) or u/s 36 (l)(iii) as an expenditure incurred wholly and exclusively for the purposes of business as held by various decisions right from beginning of the Income Tax Act.
- interest on monies borrowed for purchase of shares held as investment is not allowable whether or not there is any yield of dividend
- Irrespective of dividend receipt, expenditure has to be allowed. Now since dividend is exempt, as a consequence thereof expenditure has to be disallowed.”
Ruling of Honorable Delhi High Court:
- The factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment.
- Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment.
- The interest expenditure incurred by the Assessee is in relation to such investments which give rise to income which does not form part of total income.
- the Court answers the question framed by holding that the expression „does not form part of the total income‟ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income.
- Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.
- The impugned order of the ITAT is set aside and the appeal is allowed in the above terms.
- This Court should not be understood to have expressed any opinion on the issue of whether for the AY in question the interest expenditure incurred by the Assessee would be allowable as business expenditure under Section 36 (1)(iii) of the Act.
Key Take Away
No disallowance u/s 14A can be made in a year in which no exempt income has been earned or received by the assessee. S. 14A also does not apply to shares bought for strategic purposes.