i. There is no interest expenses relatable to exempt investment. Assessee has made investment in the heads of tax free income. Investment in equity shares, insurance policies etc. are related to earlier years and were invested from the own capital funds. Therefore that investment is not related to this year. Hence, provisions of sec 14A are not applicable on that investment. Disallowance u/s 14A is applicable only investment made relating to exempt income during the year. If such investment made from own fund or interest free fund, provision u/s 14A is not attract.

ii. Reliance is placed on decision of Hon’ble High Court of Bombay in the case of Commissioner of Income Tax Vs. HDFC Bank Ltd [I.T. Appeal No. 330 of 2012]. In which Hon’ble Court held that:

Assessee’s capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. it would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee.

iii. Hon’ble Bombay High Court in the case of Commissioner of Income Tax v/s Reliance Utilities and Power Ltd., reported in (2009) 313 ITR 340 (Bom) is well founded. The facts of that case were that the Assessee viz. M/s Reliance Utilities and Power Ltd. had invested certain amounts in Reliance Gas Ltd. and Reliance Strategic Investments Ltd. It was the case of the Assessee that they themselves were in the business of generation of power and they had earned regular business income therefrom. The investments made by the Assessee in M/s Reliance Gas Ltd. And M/s Reliance Strategic Investments Ltd. were done out of their own funds and were in the regular course of business and therefore no part of the interest could be disallowed.

iv. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. Hon’ble Supreme Court in East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.’s case (1982) 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there were funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment.

v. It is also submitted that assessee company has not received any exempt income and in the absence of the assessee receiving any exempt income, there is no justification in deriving expenses attributable for earning income which is not received by the assessee. Reliance is placed on the recent decision of the Honble Allahabad High Court in the case of CIT v. M/s. Sivam Motors (P) Ltd. in ITA No. 88 of 2014 dated 5-5-2014 for the assessment year 2008-09. Hon’ble Allahabad High Court held that “ section 14A of the Act provides that for the purposes of computing the total income under the Chapter, 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 the Act. Hence, what section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. The finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the Commissioner (Appeals), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2,03,752 made by the assessing officer was in order.’

vi. The Gujarat High Court in the case of CIT v. Corrtech Energy (P) Ltd. (supra) held as under :

“We have given our thoughtful consideration to the facts and the decision relied upon by the learned authorised representative. The Honble Punjab & Haryana High Court in the case of CIT v. Winsome Textile Industries Ltd. (2010) 31 (I) ITCL 212 (P&H-HC) : 2009 TaxPub(DT) 2012 (P&H-HC) : (2009) 319 ITR 204 (P&H) has held that in the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application. In this case also, the assessee has not claimed any exempt income in this year. Therefore, respectfully following the judgement of Honble High Court of Punjab & Haryana in the case of CIT v. Winsome Textile Industries Ltd. (supra), we hereby allow this ground and direct the assessing officer to delete the addition.

vii. In the case of CIT v. Winsome Textiles Industries Ltd. (2010) 31 (I) ITCL 212 (P&H-HC) : 2009 TaxPub(DT) 2012 (P&H-HC) : (2009) 319 ITR 204 (P&H) the Honble Punjab & Haryana High Court held that when there is no claim for exemption of income in such situation section 14A has no applicable.

VINOD JILWANE ,Tax Laws Advocate

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