Ultramarine & Pigments Ltd. V/s ACIT (ITAT Mumbai)- The undisputed fact is that there are no fresh loans or investments during the year. The Hon’ble Jurisdictional High Court in K. Raheja Corporation Pvt. Ltd. (supra) laid down that when the Revenue cannot point out as to how interest on borrowed funds was attributable to the earning of dividend income which was exempt under section 10(33) of the Act (as it then stood)’ no dis allowance can be made. It laid down that in the absence of any material or basis to hold that the interest expenditure directly or indirectly is attributable for earning the dividend income’ no dis allowance of interest can be made under section 14A. The assessee has filed before us a table showing capital’ reserves of the company and the investment in TCL shares. A perusal of the same demonstrates that there is no incremental investment in shares during the year. Under these circumstances’ we agree with the contention of the assessee. As certain expenditures can reasonably be estimated and disallowed under section 14A’ as agreed to by both the parties’ we set aside the impugned order passed by the Commissioner (Appeals) and restore the matter to the file of the Assessing Officer for determining the same. This ground is’ thus’ allowed for statistical purposes.
Tribunal held that arguments of the tax department that the amounts were invested for controlling interest and that there was no dividend income which was earned, were devoid of merit. Section 90(2) of the Act makes it compulsory for the AO to apply the provisions of the Act to the extent they are more beneficial to the taxpayer. Accordingly, under the provisions of the Act net income would be a negative figure and since the provisions of the Act are more beneficial to the taxpayer they would be applicable. Accordingly, the Tribunal allowed the interest paid on borrowed funds utilised for purchase of shares in TCLIM.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA no. 2775/Mum./2005 -(Assessment Year: 2001-02)
Ultramarine & Pigments Ltd. V/s Asst. Commissioner of Income Tax
ITA No. 3395/Mum./2005 – (Assessment Year : 2001- 02)
Asstt. Commissioner of Income Tax v/s Ultramarine & Pigments Ltd.
Date of Order – 30.12.2011
PER J. SUDHAKAR REDDY. A.M.
These cross appeals were restored to the file of Tribunal by the Hon’ble Jurisdictional High Court vide its judgment dated 8th February 2011′ passed in Income Tax Appeal no.467 of 2010. A perusal of the judgment passed by the Hon’ble Jurisdictional High Court discloses that two questions only require adjudication afresh by the Tribunal. The first being disallowance of interest of 78’72’653′ on the ground that the investments were made in a Malasian company M/s. TCLIM’ for giving controlling interest and secondly’ determination of disallowance under section 14A of the Income Tax Act’ 1961 (for short “the Act”).
2. Brief facts of the case’ as brought out by the Tribunal in its order dated 16th April 2009′ are extracted below for ready reference:-
“2. We first take up the issue relating to dis allowance of interest which is common in all the appeals i.e. in the appeals of the assessee for assessment years 2001-02 and 2002 -03 as well as in the cross appeal of the revenue for assessment year 2001-02. Briefly stated, the facts of the case are that the assessee company belongs to Thirumali group. Another company of the same group i.e Thirumalai Chemicals Ltd. (TCL) had formed a joint venture with an Australian company, named as Thirumalai Chemical Industries Ltd. (Malaysia) (TCLIM). The joint venture had been formed for manufacturing of maleic anhydride. Initially TCL had 25% share holding in the join venture. The joint venture had been incurring losses since 1999.
2.1 During the assessment year 2001-02, the assessee had taken short term loan of Ps.9 crores on 9.6.2000 from Exim Bank to meet the short term financial needs on which interest cost of Rs. 78,72,653/- had been incurred. The assessee had also been sanctioned long term loan of r 7 crores vide letter dated 5.6.2000 of Exim Bank and the purpose of the loan was to part finance the assessee’s equity investment in TCLIM. Interest expenditure incurred during the year on this account was Ps.67,14,246/-. The AO on examination of record noted that short term loan of Rs. 9 crores had been received on 9.6.2000 and on the same date the assessee issued cheque of Rs. 8,98,00,000/- for investment in 76,00,000 ordinary shares of TCLIM. From the bank statement, AO also noted that opening balance in the bank account on 9.6.2000 was Rs. 1,05,244/- and the closing balance after considering the loan received and the payment for acquisition of shares was Rs. 3,03,744/- make it clear that almost entire loan had been utilized for acquisition of shares. The AO also noted that shareholding of the group in TCLIM before the investment was 49.71 % and after the acquisition of shares share holding went up to 59.6l% which consisted of 39.93% by TCL and 19.68% by Ultramarine & Pigments Ltd. i.e. the assessee. TCLIM had incurred operating loss PL 5.9 million and net loss of PL 12.2 Million for the year ending 31.3.2000. The assessee has not received any dividend from the shares held in that company.
2.2 The AO asked the assessee to explain as to why the expenditure on account of interest should be disallowed as no dividend income had been received and investment had been made for acquiring controlling stake in the joint venture. The assessee explained that in the first year TCLIM had earned profit but was incurring losses from 1999 due to south east Asian crisis and severe competition in the industry. It was also submitted that the assessee would receive dividend as and when the company made profit in future. It was argued that the assessee had shareholding of only 19.68% and therefore investment was not for gaining control by the assessee. The assessee pleaded that investment in shares by other group companies should not be included while considering the controlling stake. The AD however did not accept the explanation of the assessee. It was noted by him that the assessee had 22.7% share holding in TCL and MD of the assessee company was on the board of that company. Similarly Chairman and MD of the TCL was also on the board of the assessee company. AD further observed that TCLIM had incurred loss in subsequent years also. The AD accordingly held that the purpose for acquisition of shares by the assessee was not to earn dividend but it was only for having controlling stake of the group in the said company. He referred to the judgment of Hon’ble High Court of Mumbai in case of Amritaben P. Shah (238 ITP 777) in which it was held that in case the purpose of investment was for acquiring controlling stake, interest on borrowings could not be allowed under section 57 (iii) as the borrowings could not be said to be for the purpose of earning dividend. There was no return from the investment in equity shares of TCLIM. The AO accordingly disallowed the entire claim of interest of Rs. 78,72,653/-.
2.3 The A.O. further noted that in addition to investment in shares of TCLIM assessee had also made investment in shares of other companies aggregating Rs. 13,47,51,474/- out of which sum of Rs. 13,47,49,624/- was represented by the investment made in the equity shares of TCL, the group company and assessee had received total dividend of r 67,82,577. The A.O. noted that holding of investment in shares was not the business activity of the assessee and the dividend income from shares was exempt from tax. He therefore asked the assessee to explain as to why the interest on borrowings invested in shares should not be disallowed. The assessee explained that investment in shares was not out of borrowed funds as the assessee had sufficient capital and free reserves. It was pointed out that as on 31.3.2001 capital and reserve was Rs. 38.97 lacs whereas the investment as on that date was only Rs. 22.46 lacs. The AO however noted that the assessee was not maintaining any separate bank account for investments in shares. There was intermixing of own fund and borrowed fund. The assessee could not prove that borrowed funds were utilized for making investments in shares. He therefore did not accept the explanation that borrowed funds was not utilized for making investment in shares. It was noted by him that the total interest paid by the assessee was Rs.2,86,28,019/- and after excluding the interest paid on borrowings invested in shares of TCLIM, the balance common interest was Rs.2,07,55,366/-. He therefore allocated the interest towards investment in shares in the ratio of Investment to capital employed. Capital employed as per the books was r 60,93,57,615/-. Accordingly he computed the proportionate interest of r 46,89,714/- which he allocated in investment in shares. Since the dividend income was exempt, he disallowed the interest to the tune of Rs.45,89,714/- under section 14A of the I. T. Act.
2.4 In appeal, CIT(A) agreed with the view taken by the AO for making allocation of interest on proportionate basis. However he observed that this basis should be adopted in respect of entire investment including the share investments in TCLIM. The total investment in shares including that of TCLIM was Rs. 22,45,50,474/- and total interest paid was Rs.2,86,28,019/-. The other investments in shares as per CIT(A) must also have been made for the purpose of retaining the controlling interest and not for any dividend and therefore it was held by him that proportionate interest should be disallowed in the ratio of total investments in shares to the capital employed. Aggrieved by the decision of the CIT(A) both the parties are in appeal. The assessee is in dispute against the decision of CIT(A) upholding some dis allowance in relation to investment in shares in TCLIM & TCL. The revenue is aggrieved by the decision of CIT(A) to disallow the interest only on proportionate basis.”
3. Grounds no.1 and 2 of the assessee’s appeal and ground no.1 of Revenue’s appeal are on the issue of dis allowance of claim made on interest paid on loan taken to part finance the assessee’s equity investment in TCLIM. The Hon’ble High Court’ on an agreement between both the parties’ came to a conclusion that the judgment in CIT v/s Amritaben Shah’  238 ITR 777 (Bom.)’ is not applicable to the facts of the case. As the Revenue conceded before the High Court’ we are not required to adjudicate this matter.
4. Learned Counsel’ Mr. Hiro Rai’ representing the assessee’ submitted that the assessee borrowed money and made investment in a Malasian company’ income from which was taxable under the Act. He pointed out that the dividend income received from domestic companies are exempt under section 10(34) of the Act and this exemption does not apply to dividend received from shares held in a foreign company. He referred to the order of the Assessing Officer and submitted that the fact that the assessee has borrowed amounts from Exim Bank for making investment in TCLIM’ is not in dispute. He pointed out that the ground on which the Assessing Officer made dis allowance was that the assessee had purchased shares for acquiring controlling interest and secondly that the TCLIM is a loss making and there is no scope of earning any dividend income. He relied on the judgment of Hon’ble Jurisdictional High Court in CIT v/s Modi Pvt. Ltd.’  208 ITR 13 (Bom.)’ for the proposition that interest paid on borrowings for purchase of shares of “A” company is allowable under section 57(iii) of the Act. He pointed out that the assessee’ in that case’ had purchased majority of shares of another company known as Associate Bombay Cinemas Ltd.’ which was running the Strand Cinema in Bombay. He further relied on the judgment of Hon’ble Supreme Court in CIT v/s Rajendra Prasad Moodi’  115 ITR 519 (SC)’ for the proposition that the Act does not say that the expenditure shall be deductible only if any income is made or earned. He pointed out that the assessee company was already holding 49.71% of TCLIM and to acquire more than 50% of shares only a few lacs rupees of investment was required and the amount of 9’00’00’000′ was not required. He relied on the judgment of Hon’ble Jurisdictional High Court in CIT v/s Phil Corpn. Ltd.’  202 Taxman 368 (Bom.)’ for the proposition that the assessee would be entitled to deduction of interest paid on overdraft under section 36(1)(iii) even if the assessee had invested the amount in question for having control over majority of shares but not to earn dividend. He relied on the judgment of Hon’ble Jurisdictional High Court in Ormerods (India) P. Ltd. v/s CIT  036 ITR 0329 (Bom.)’ for the proposition that when money is borrowed for purchase of shares and no dividend income is earned’ interest on borrowed money should be set-off against other income.
5. As regards ground no.1′ i.e.’ dis allowance under section 14A of the Act’ the learned Counsel submitted that’ in normal course’ the issue should be restored to the file of Assessing Officer for adjudication afresh but his case is that the Tribunal in assessee’s own case for the earlier assessment year 1996- 97 to 2000- 01′ has’ on identical facts’ come to a conclusion that the assessee has own funds which were invested in shares and that the investments during the year is less than the profits earned by the assessee during the year. He submitted that during the year’ there is no additional investment in shares of Indian company. He relied on the findings of the Tribunal for the earlier assessment years as well as the judgment of Hon’ble Jurisdictional High Court in K. Raheja Corporation Pvt. Ltd. in Income Tax Appeal no.1260 of 2009′ judgment dated 8th August 2011′ for the proposition that when investments are made out of assessee’s own funds and not out of borrowed funds’ no dis allowance can be made on account of interest expenditure under section 14A. On a query from the Bench’ he submitted that the Assessing Officer has not attributed any expenditure to the earning of dividend and a reasonable amount may be disallowed. He relied on the decision of Mumbai “B” of the Tribunal in Bunge Agribusiness (I) Pvt. Ltd. v/s DCIT’  132 ITD 549 (Mum.).
6. Learned Departmental Representative’ on the other hand’ controverted submissions of the learned Counsel and submitted that there was no explanation given as to why the assessee has borrowed huge funds for making investment in a loss making company situated in foreign country. He pointed out that the assessee was already holding 49% of the foreign company and wanted to acquire 2/3rd of shares for getting controlling interest. He referred to the order of the authority below and argued that the expenditure incurred by way of interest payment cannot be allowed as a deduction under section 36(1)(iii) or under section 57 (iii). He submitted that the provisions for double taxation avoidance agreement between India and Malaysia have not been examined and it is not known whether the dividend income from a Malaysian company is exempt from tax or not. On section 14A dis allowance’ the learned Departmental Representative submitted that the issue should be restored to the file of Assessing Officer for adjudication afresh in the light of the Hon’ble Jurisdictional High Court’s judgment in Godrej & Boyce Mfg. Co. Ltd. v/s DCIT’ (2010)’ 328 ITR 081 (Bom.).
7. In reply’ the learned Counsel submitted that the assessee is an Indian company and is liable to tax in respect of total world income. His case is that the income from dividend receivable from the Malaysian Company would be taxable in India under the head “Income From Other Sources” and that the expenditure incurred is allowable under section 57(iii). He submitted that under Article 11 of AADT between India and Malaysia’ dividend would be chargeable to tax in Malaysia’ and that there would be no question of any allowance of any interest since under the Treaty’ the said dividend is not taxable in India. He submitted that under section 90(2) of the Act’ the assessee had the option of being assessed under the normal provisions of the Act rather than under the Treaty to the extent it is not more beneficial to it. Thus’ he submitted that the assessee is entitled to deduction on money borrowed and invested in shares of a Malaysia company for the purpose of earning dividend. He’ accordingly’ prayed for relief.
8. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record’ as well as the case laws cited before us’ we hold as follows:-
9. Grounds no.1 and 2 of assessee’s appeal and ground no.1 of Revenue’s appeal are on the issue of allow ability of interest under section 57(iii) on amounts borrowed from Exim Bank’ for the purchase of shares in TCLIM’ which is a Malaysian company. The assessee had taken a long term loan of ~ 9’00’00’000. Before the High Court’ when the matter came up’ both the parties agreed that the judgment of Hon’ble Jurisdictional High Court in Amritaben Shah (supra)’ has no application to the facts of the case. In view of this specific concession given by the Revenue’ we now consider the other case laws relied on during the course of hearing and adjudicate the matter. 10. In the case of Moodi Pvt. Ltd. (supra)’ the Hon’ble Jurisdictional High Court held as follows:-
“In respect of the interest paid on monies borrowed for purchase of shares of A Co, the Tribunal held that the claim of the assessee should be allowed under section 57(iii) of the Income-tax Act 1961, since the moneys were borrowed for purchase of shares from which the assessee expected to receive dividends and hence the expenditure was clearly laid out or expended wholly and exclusively for the purpose of making or earning income. On a reference:
Held, affirming the decision of the Tribunal, that the expenditure on interest paid on borrowings for purchase of shares of the managed company W Co., was allowable deduction under section 10(2)(xv) of the Indian Income tax Act 1922, or under section 37(1) of the Income-tax Act, 1961, and the interest paid for acquisition of shares of A Co. was allowable as deduction under section 57(iii) of the Income Tax Act, 1961.”
11. The Hon’ble Supreme Court in Rajendra Prasad Moodi (supra)’ held as follows:-
“Where the assessee borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those monies: Held, accordingly, that the interest on monies borrowed for investment in shares which had not yielded any dividend was admissible as a deduction under section 57(iii) of the Act, in computing its income from dividend under the head “Income from other sources”.
12. The Hon’ble Jurisdictional High Court in Ormerods (India) P. Ltd. (supra) held as follows:-
“Held, (i) that the word “purpose” in the expression “expenditure incurred solely for the purpose of making or earning such income, profits or gains” in section 12(2) of the Income-tax Act, did not mean motive for the transaction; much less could it mean the ulterior motive or the ultimate object of the purchase of the shares by the assessee; and therefore, the finding of the Tribunal that the purchase was made to serve the convenience of two others was no more than a finding as to the ulterior motive in purchasing the shares, whereas the purpose of the purchase was a entirely different matter;
(ii) that the only conclusion, on the facts, was that these investments were made for the purpose of earning income or dividends or for making profits or gains;
(iii) that, therefore, the interest paid by the assessee on moneys borrowed for the purchase of shares could be set off against its other income under section 24(I) of the Act.”
13. The Hon’ble Jurisdictional High Court in Phil Corpn. Ltd. (supra)’ held as follows:-
“The reasoning of the Tribunal that the overdraft was not operated only for investing in the shares of subsidiary company and the fact that it was also used for investment in the shares of the sister/subsidiary company to have control over that company and, therefore, the element of interest paid on the overdraft was not susceptible of bifurcation and, therefore, the assessee was entitled to the deduction under section 36(1)iii).”
14. The learned Departmental Representative has not brought before us any contrary decision. His argument that the amounts were invested in for controlling interest and that there is no dividend income which was earned’ is devoid of merit in view of the proposition laid down in case laws quoted and reproduced above.
15. Coming to the issue as to whether the AADT with Malasia would dis entitle the deduction we agree with the submissions of the assessee that the whole world income is taxable in the hands of the assessee under the provisions of the Act and when it is done so’ section 90(2) mandates that the provisions of this Act shall apply to the extent they are more beneficial to the assessee. The assessee does have an option of being assessed under the normal provisions of the Act as claimed by the learned Counsel. The Act directs and the section makes it compulsory for the Assessing Officer to apply the provisions of the Act to the extent they are more beneficial to the assessee. When so applied in this case’ the net income would be a negative figure and the provisions of the Act would be more beneficial to the assessee.
16. In the light of the above discussion’ as no contrary decisions are cited by the Revenue’ we are bound by the judgments of Hon’ble Jurisdictional High Court cited by the assessee. Consequently’ we allow the claim of the assessee’ the interest paid on borrowed funds utilized for purchase of shares in TCLIM is hereby allowed. Thus’ grounds no.1 and 2 of the assessee’ appeal are allowed and ground no.1′ in Revenue’s appeal is dismissed.
17. Coming to ground no.2′ in assessee’s appeal i.e.’ dis allowance under section 14A’ we find that the ‘ Tribunal in assessee’s own case for assessment years 1996-97′ 1998-99′ 1999-2000 and 2000-01 in ITA no.2987 to 2989/ Mum./2005 and in ITA no.2774/Mum./2005′ order dated 2nd September 2008′ at Paras-11 and 12 / Pages-13 and 14’ held as follows:-
“On a careful consideration of the fact we find, that the equity share capital and reserves of the company which are not interest bearing funds are far in excess of the amounts invested in the shares or the amounts .financed to M/s Thirumala Chemicals Ltd. At paragraph 4 of the assessee’s paper book a chart has been provided which proves that the assessee has sufficient funds in the form of capital and reserves and the dis allowance in question is not called for. The assessee has rightly placed reliance on the judgment of the Hon’ble Supreme Court in the case of Munjal Sales Corporation Vs. CIT, 298 ITR 298 wherein it has been held that since the opening balance profits of the of the assessee firm was sufficient to cover the amounts given to the sister concerns, the Tribunal ought to have given a finding that the loans were given from the assessee’s own funds. In this case also the incremental investments are much lesser than the profit after tax earned during the respective assessment year and the opening balances in the form of capital plus reserve are in excess of the investment made. Similarly the Delhi High Court in the case of CIT Vs Tin Box 260 ITR 637 (Del) held that the Tribunal has right when it found that the capital of the firm and interest free unsecured loans with the assessee, far exceeded the amounts advanced to sister concerns in all the years under appeal. It also held that the revenue had not pointed out any specific interest bearing borrowed funds which have been diverted by the assessee to the sister concerns and hence the disallowance is bad in law. Similar is the decision of the Hon’ble Madras High Court in the case of CIT v/s Hotel Savera, 239 ITR 795. The Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd 92 lTD 119 on page 121 held as follows:
Section 14A, read with section 36(1)(iii) of the Income-tax Act, 1961 – Expenditure incurred in relation to income not includible in total income – Assessment year 1999- 2000- Assessee had paid interest to certain parties on advances, deposits, etc. – It had also invested in shares yielding tax-free income – Assessing Officer, relying on section 14A, calculated interest on total investment in shares and made dis allowance- Commissioner (Appeals) also held that there was direct nexus between funds borrowed and investment in shares yielding tax-free income but, made dis allowance on day to day working product method- Whether nexus between borrowed funds and investment can be said to be established only where it is shown that interest free fund are not, available with assessee- Held, yes- Whether since Commissioner (Appeals) had merely picked up sources on which interest was paid by assessee and had completely ignored other sources and further that interest free funds were available to assessee for making investment which far exceeded investment in shares order of Commissioner (Appeals) was to be set aside and, addition was to be deleted – Held, yes.”
12. The Mumbai Bench of the Tribunal in the case of CIT vs BSES Ltd. 113 TTJ 227 (Mum) had held that apportionment of interest expenses for the purpose of disallowance u/s 14A, without bringing anything on record to show nexus is bad in law. Respectfully following these case laws and as the revenue has failed to demonstrate any nexus between the borrowed funds and the investment in shares or the loans advanced to sister concern and as the dis allowance has been made on ad-hoc basis and as the assessee has proved that he has sufficient interest free funds, we hold that no dis allowance can be made either u/s 36(1)(iii) or u/s 14A. Thus, ground No.2 of the assessee is allowed.”
18. The undisputed fact is that there are no fresh loans or investments during the year. The Hon’ble Jurisdictional High Court in K. Raheja Corporation Pvt. Ltd. (supra) laid down that when the Revenue cannot point out as to how interest on borrowed funds was attributable to the earning of dividend income which was exempt under section 10(33) of the Act (as it then stood)’ no dis allowance can be made. It laid down that in the absence of any material or basis to hold that the interest expenditure directly or indirectly is attributable for earning the dividend income’ no disallowance of interest can be made under section 14A. The assessee has filed before us a table showing capital’ reserves of the company and the investment in TCL shares. A perusal of the same demonstrates that there is no incremental investment in shares during the year. Under these circumstances’ we agree with the contention of the assessee. As certain expenditures can reasonably be estimated and disallowed under section 14A’ as agreed to by both the parties’ we set aside the impugned order passed by the Commissioner (Appeals) and restore the matter to the file of the Assessing Officer for determining the same. This ground is’ thus’ allowed for statistical purposes.
19. In the result’ Revenue’s appeal is dismissed.
20. To sum up’ assessee’s appeal is partly allowed and Revenue’s appeal is dismissed.
Order pronounced in the open Court on 30.12.2011