PRINCIPAL COMMISSIONER OF INCOME TAX 2 V. GUJARAT STATE FINANCIAL SERVICES LTD

TAXAP/1255/2018

AI Insights

The case involves the Principal Commissioner of Income Tax-2 as the appellant and Gujarat State Financial Services Ltd as the respondent. The core issue was the disallowance of expenditure related to investments earning tax-free income, assessed under section 14A read with rule 8D of the Income Tax Act, 1961. The Assessing Officer initially disallowed Rs.5,78,22,678, which was later reduced to Rs.15,44,972 by the Tribunal. The Revenue challenged this reduction, citing the Supreme Court's decision in Maxopp Investment Ltd. vs. CIT, which supported the application of section 14A in cases where investments yield tax-free income. However, the Tribunal's decision was upheld, emphasizing that the assessee did not use interest-bearing funds for tax-free investments.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 698215 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 15-10-2018
• Assessment Year: misc
• Other Referred Cases: Maxopp Investment Ltd. vs. CIT, S. A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals), CIT vs. Dalmia Cement (B) Ltd., Deputy Commissioner of Income Tax Vs. Vasco Sales & Marketing Corpn., Max India Ltd. vs. CIT, Gujarat State Fertilizer and Chemicals Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MANISH SHAH
• Assessee Lawyers: MAUNA BHATT
• Keywords: Exempt income; Income tax appellate tribunal; Interest Expenditure; Tax-free income; Tax Disallowance
• Section: 14A; 8D

Judgement Text

"C/TAXAP/1252/2018 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 1252 of 2018 With R/TAX APPEAL NO. 1253 of 2018 With R/TAX APPEAL NO. 1255 of 2018 ========================================================== PRINCIPAL COMMISSIONER OF INCOME TAX-2 Versus GUJARAT STATE FINANCIAL SERVICES LTD ========================================================== Appearance: MRS MAUNA M BHATT(174) for the PETITIONER(s) No. 1 MR MANISH J SHAH(1320) for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA Date : 15/10/2018 COMMON ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. These Tax Appeals are filed by the Revenue. Facts being identical, we may notice from Tax Appeal No.1252 of 2018. Revenue has challenged the judgment of the Income Tax Appellate Tribunal dated 06.04.2018 raising following questions for our consideration: “[A] Whether the Appellate Tribunal had erred in law and on facts restricting the disallowance to Rs.15,44,972/­ instead of Rs.5,78,22,678/­ u/s.14A r.w.r 8D of the Act? [B] Whether the Appellate Tribunal had erred in law and on facts by not appreciating the ratio decided in Maxopp Investment Ltd. vs. CIT?” 2. In relation to the respondent­assessee, for the Page 1 of 10 C/TAXAP/1252/2018 ORDER assessment year 2008­09, the question of disallowance of expenditure in terms of section 14A of the Income Tax Act, 1961 ('the Act' for short) and rule 8D of the Rules came up for consideration before the Assessing Officer. The Assessing Officer noted that the assessee had invested its funds in investments earning tax free income. He therefore disallowed interest expenditure of Rs.5,78,22,678/­ in terms of section 14A read with rule 8D of the Rules. The issue ultimately reached the Tribunal. The Tribunal restricted the disallowance to Rs.15,44,972/­ which could be attributed to such activity. It is this judgment of the Tribunal, the Revenue opposed in this appeal. The main contention of the counsel for the Revenue revolves around the judgment of the Supreme Court in case of Maxopp Investment Ltd. v. Commissioner of Income Tax reported in [2018] 402 ITR 640 (SC). Counsel argued that whenever the assessee has two sources of funds, interest bearing and non interest bearing and also made investments in funds yielding tax free income, disallowance in terms of section 14A of the Act would have to be made. If the assessment is in relation to the year after Page 2 of 10 C/TAXAP/1252/2018 ORDER introduction of rule 8D, the formula provided therein would also apply. According to him, one of the issues decided by the Supreme Court in case of Maxopp Investment Ltd. (supra) was this one. 3. On the other hand, learned advocate Shri Shah for the respondent opposed the appeal contending that the Tribunal has correctly assessed the materials on record and found that no interest bearing funds were diverted for making tax free income. He pointed out that all the investments were of the past years and no fresh investments during the current year were made. We had an occasion to examine the judgment of the Supreme Court in case of Maxopp Investment Ltd. (supra) in context of similar challenge of the Revenue. The Tax Appeal was dismissed making following observations: “10. As is well known, Section 14A of the Act relates to expenditure incurred in relation to income not includable in total income. Subsection (1) of Section 14A provides that for the purposes of computing total income under Chapter­IV 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. As per sub­section (2) of Section 14A the Assessing Officer would determine the amount of expenditure incurred in relation to such income which does not Page 3 of 10 C/TAXAP/1252/2018 ORDER form part of the total income in accordance with the method as may be prescribed, if having regard to the accounts of the assessee he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. The method for such purpose has been prescribed under Rule 8D of the Rules. Sub­rule (1) of Rule 8D substantially reiterates what sub­section (2) of Section 14A provides. Essentially under sub­rule (1), the Assessing Officer would be authorized to determine the expenditure to be disallowed in relation to earning tax free income in terms of sub­rule (2) where having regard to the accounts of the assessee of the previous year he is not satisfied with the correctness of the claim of expenditure made by the assessee or the claim made by the assessee is that no expenditure has been incurred in relation to income which does not form part of total income. 11. In case of S. A. Builders Ltd., vs. Commissioner of Income­Tax (Appeals), reported in (2007) 288 ITR page 1 (SC) the Supreme Court considered an issue where the Revenue desired to disallow an assessee’s claim of expenditure of interest on borrowed capital which was lent to its sister concern without charging interest. The Supreme Court interpreted the term “for the purpose of the business” used in Section 36(1)(iii) of the Act in such context. The Supreme Court approved the decision of the Delhi High Court in case of CIT vs. Dalmia Cement (B) Ltd., reported in (2002) 254 ITR 377 and observed that once it is established that there was nexus between the expenditure and the purpose of business which need not necessarily be the business of the assessee itself, the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the Board of Directors and assume the rule to decide how much is reasonable expenditure having Page 4 of 10 C/TAXAP/1252/2018 ORDER regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The transfer of borrowed funds to a sister concern has to be seen from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 12. The exposition of law made by the Supreme Court in case of S. A. Builders and observation made therein have been applied by this court on various occasions, particularly in connection with the disallowance to be made under Section 14A of the Act. It has been held that if the assessee can demonstrate availability of surplus interest free funds for making investment generating tax free income, disallowance under Section 14A of the Act would not be justified. 13. In case of this very assessee such an issue came up for consideration for the assessment year 2008­09. In such case the Tribunal had held that Section 14A read with Rule 8D could be applied only after the Assessing Officer is not satisfied with the claim of the assessee regarding the expenditure. The Revenue had approached the High Court against the judgment of the Tribunal. The Court dismissed the appeal by judgment dated 6.9.2017 making following observations: “ 5. Learned counsel for the Revenue was unable to point out that these observations on facts by the Tribunal to the effect that the assessee had interest free funds far in excess yield tax exempt income was wrong. That being the position as held by this Court in number of occasions including judgments in case of Deputy Commissioner of Income Tax Vs. Vasco Sales & Marketing Corpn. reported in 66 taxmann.com 366 relying upon the judgment of the Supreme Court in case of Page 5 of 10 C/TAXAP/1252/2018 ORDER S A Builders Limited Vs. Commissioner of Income Tax (Appeals), Chandigarh reported in 288 ITR 1, disallowance under section 14A would not be permissible. We do not find that the Tribunal has committed any error.” 14. As pointed out by the counsel for the assessee Punjab & Haryana High Court in case of M/s. Max India Ltd., in a judgment dated 8.3.2017 considered a similar issue as under: “6. With regard to the second issue regarding expenditure related to exempt income, the same is covered by the decision of this Court in the case of the assessee in Commissioner of Income Tax, Jalandhar I, Jalandhar vs. M/s Max India Limited, ITA No.186 of 2013, decided on 6.9.2016, wherein after considering the relevant case law on the point, the issue was decided in favour of the assessee and it was recorded thus: “ 9. This presumption is unfounded. Merely because the interest free funds with the assessee have decreased during any period, it does not follow that the funds borrowed on interest were utilized for the purpose of investing in assets yielding exempt income. If even after the decrease the assessee has interest free funds sufficient to make the investment in assets yielding the exempt income, the presumption that it was such funds that were utilized for the said investment remains. There is no reason for it not to. The basis of the presumption as we will elaborate later is that an assessee would invest its funds to its advantage. It gains nothing by investing interest free funds towards other assets merely on account of the interest free funds having decreased. In that event so long as even after the decrease Page 6 of 10 C/TAXAP/1252/2018 ORDER thereof there are sufficient interest free funds the presumption that they would be first used to invest in assets yielding exempt income applies with equal force.” Learned counsel for the appellant revenue has not been able to distinguish the aforesaid decision taken by this Court.” 15.Division Bench of this Court in case of Gujarat State Fertilizer and Chemicals Ltd., in a judgment dated 31.7.2018 followed the earlier judgment in case of the assessee and observed as under : “16. Considering the aforesaid findings and decision of the Division Bench of this Court of the very assessee for the Assessment Year : 2004­2005, the Division Bench of this Court in the case of the very assessee has set aside /deleted the similar disallowance made by the Assessing Officer under Section 14A of the Act, the same has been been subsequently followed in the case of the very assessee that in the proceeding years, i.e. 2005­2006 to 2007­2008. The Division Bench of this Court in the aforesaid decision has specifically observed that in a case where the assessee was having sufficient funds available with it, more than amount invested for earning the dividend, the disallowance in respect of interest expenditure under Section 14A of the Act read with Rule 8(d) of the Rules is not permissible. The decision of the Division Bench of this Court in the case of the very assessee for the Assessment Year : 2004­2005 has attained finality. In the present case, it is required to be noted that in the earlier years also more particularly, even in the Assessment Year : 2004­2005, the assessee was also having mixed funds and still considering the fact that the assessee was already having sufficient surplus interest free funds, Page 7 of 10 C/TAXAP/1252/2018 ORDER the Division Bench of this Court has held that the disallowance under Section 14A of the Act is not permissible. At the cost of repetition, it is observed that the said decision has attained finality between the parties. Not only that, but the Department has followed the same in the subsequent assessment years also. Considering the aforesaid facts and circumstances, it cannot be said that the Tribunal has committed any error in deleting the disallowance made by the Assessing Officer under Section 14A of the Act. Therefore, the two Tax Appeals No.900/2018 and 901/2018 stands dismissed so far as the proposed question No.2 (a) is concerned.” 16. The primary question which the Supreme Court considered in case of Maxopp Investment Ltd., (Supra) was whether disallowance of expenditure under Section 14A of the Act would be applicable in a case where shares or stocks of a company were purchased for the purpose of gaining control over the said company and incidentally tax free dividend income was generated. The assessee had contended that the dominant intention for purchasing the shares was not for earning the dividend but to gain control over the business in the company in which the shares were purchased. The Supreme Court held that the purpose for which the shares were purchased was inconsequential. As long as such investment generated tax free income, disallowance of expenditure for making such investment would be justified. This issue does not arise in the present case. However, it is true that while disposing of bunch of appeals by the said judgment the Supreme Court also considered the correctness of the view of the Punjab & Haryana High Court in case of Avon Cycles Ltd. It was the case in which the Assessing Officer had invoked Section 14A read with Rule 8D and apportion the expenditure between investments made for earning tax Page 8 of 10 C/TAXAP/1252/2018 ORDER free income and the rest. The CIT (Appeals) had deleted the entire disallowance upon which in the appeal filed by the Revenue the Tribunal restored portion of the disallowance observing that the funds utilized by the assessee being mixed funds, the disallowance is confirmed in view of the provisions under Rule 8D(2) of the Rules. This decision of the Tribunal was challenged before the High Court. The Court held that the funds utilized by the assessee were mixed funds and the interest paid by the assessee is also an interest on the investments made, was the finding of fact and therefore, no substantial question of law arises. This judgment was carried in appeal by the assessee. The Supreme Court dismissed the appeal confirming the decision of the High Court. 17. We do not find that this portion of the judgment of the Supreme Court in case of Maxopp Investment Ltd., can be seen as fundamentally changing the understanding and interpretation of Section 14A and Rule 8D of the Rules adopted by this Court and various Courts, noted above. This judgment does not lay down a proposition that the requirement of sub­rule (1) of Rule 8D of the satisfaction to be arrived by the Assessing Officer before applying the formula given in sub­rule (2) of Rule 8D is done away with. In other words, the judgment in case of Maxopp Investment Ltd., does not lay down a proposition that the moment it is demonstrated that the assessee had availed of mixed funds i.e. interest free as well as interest bearing funds and utilized them for making investments into securities earning tax free income and the rest applicability of the Section 14A read with Rule 8D would be automatic. We are conscious that neither in M/s. Max India Ltd., Punjab & Haryana nor in Gujarat State Fertilizer and Chemicals case, this High Court had noticed the judgment of the Supreme Court in case of Page 9 of 10 C/TAXAP/1252/2018 ORDER Maxopp Investment Ltd. Nevertheless in view of the discussion above, in our opinion the situation would not change on account of the said judgment of the Supreme Court. 18. All tax appeals are dismissed.” 4. In the result, these Tax Appeals are also dismissed. (AKIL KURESHI, J) (B.N. KARIA, J) ANKIT SHAH Page 10 of 10 "