Fact of the Case
In the balance sheet of the assessee, A.O. noted that there was a term loan of Rs.7,58,09,730/- from Axis Bank. Further the assessee has invested in fully paid equity shares of Pollen Dealcom Pvt. Ltd. amounting to Rs.6 crores. Beside there were other investment also which consists of fully paid equity shares of Sun Rise Tie-up Pvt. Ltd. amounting to Rs.90,225/- and Reliance Medium Term Fund-Daily Dividend Plan amounting to Rs.1,25,24,400/-.
The assessee has shown dividend income of Rs.2,26,517/- under the head “other income”. The auditor had shown in the tax audit report amounting to Rs.23,094/- as inadmissible under section 14A. A.O. during the assessment proceedings disallowed a sum of Rs.34,74,755/- out of total sum of Rs.43,54,906/- debited in the profit & loss account on account of interest on term loan by invoking provision of Section 14A of the Income Tax Act in respect of entire investment.
Contention of the Assessee
The assessee explained that the loan taken from Axis Bank was utilized for the purpose of giving a deposit of Rs.6 crores to M/s. Pollen Dealcom Pvt. Ltd. for generating business of the assessee and therefore, the interest paid on such loan was business expenditure and, therefore, no disallowance under section 14A other than what has already been made in the return of income. The shares of Pollen Dealcom Pvt. Ltd. were received as security for the interest free security deposit given to Pollen Dealcom Pvt. Ltd with specific condition that no dividend would ever be declared on such shares and that the assessee could never sell those shares to any third party.
Observation of CIT (A)
CIT (A) deleted the disallowance made by the A.O. observing that the agreement between the assessee and M/s Pollen specifically provides that the shares allotted to the assessee by Pollen were issued only for securing the amount of security deposit and no profit against such shares will be given by Pollen nor shall any profit accrue to the assessee in respect of those shares, thus, the assessee will not be entitled to receive any dividend on those shares. When it was specifically provided that the shares in question were not dividend bearing, then the question of any tax-free income in the form of dividend does not arise. It is clear that the assessee had not invested borrowed funds in any tax-free investment. Borrowed funds were utilized to provide security deposit for securing business for the assessee from Pollen and in lieu of securing such security deposit Pollen issued shares to the assessee.
Held by ITAT
Provisions of section 14A shall be allowed in respect of the expenditure incurred by the assessee in relation to the income which does not form part of the total income. This means that the basic condition precedent for invoking the provisions of section 14A is that there should be income which does not form part of the total income under this Act. Thus, wherever the assessee earned the interest-free income, the corresponding expenditure incurred in earning that income is to be disallowed. In the absence of any interest-free income, there cannot be any disallowance, as no corresponding expenditures were incurred to earn a particular tax-free income. As a result appeal filed by the revenue dismissed.
Case Laws Referred in support