Commissioner of Income Tax vs Gujarat Industrial Development Corporation Ltd.

Sonia Gokani, J.—Revenue has challenged the order of the Income Tax Appellate Tribunal ("the Tribunal" for short) dated 31.1.2012 u/s 260A of the income tax Act, 1961 ("the Act" for short) proposing following substantial question of law for our consideration:-- Whether on the facts and circumstances of the case, the Hon''ble Tribunal was justified in deleting addition made on account of disallowance of Rs. 6,62,50,000/- u/s. 14A of the Act?

We have heard learned counsel Mr. S.M. Mehta for the respondent. Facts lie in a narrow compass thus:-- 1.1 The assessee respondent is a the State Government owned company and is acting as development financial institution for assisting medium and large scale industries in the State of Gujarat.

Scrutiny assessment was made of the return submitted by the assessee for the Assessment Year 2004-05 of the assessee where it had determined total loss of Rs. 12,99,16,560/-. The Assessing Officer made the addition of interest expenditure on exempted income of Rs. 6,62,50,000/- u/s 40A of the Act. This included the guarantee Fee of Rs. 1,52,12,000/- and service charges of Rs. 4,49,95,181/-.

1.2 CIT(Appeals) was approached by the assessee respondent, who vide its order dated 26.9.2007 allowed the appeal and deleted the addition of Rs. 6,62,50,000/-.

1.3 Revenue challenged the said order of CIT(Appeals) before the Tribunal. The Tribunal dismissed the said appeal of the Revenue relying on the decision rendered in the case of (2005) 92 ITD 119 concurring with CIT(Appeals).

The Tribunal noted that the assessee had obtained unsecured Government loans to the tune of Rs. 384.95 crores and paid interest of Rs. 6,62,50,000/- on such loan. It invested the sum of Rs. 29,57,94,855/- in shares and received dividend u/s 10(34) of the Act, which is exempted under the law.

The Tribunal noted that there has to be nexus between the borrowed fund and investment made and the same can be established only when it is shown that interest free funds were not available with the assessee.

It is argued by the learned counsel Mr. S.M. Mehta that making an investment in equity shares bearing tax free returns, prima facie, would amount to diversion of business fund and the Tribunal has disregarded such vital aspect, and therefore, deletion of addition made on account of disallowance u/s 14A was unjustifiable.

On duly considering the submissions as also the entire gamut of facts, this Tax Appeal is not being entertained for the reasons to follow hereinafter:--

3.1 At the outset, it is needed to be mentioned that Section 14A was incorporated in relation to the income not includible in total income. The assessee obtained unsecured Government loans of huge amount of Rs. 384.95 crores and paid interest to the tune of Rs. 6.62 crores (rounded off). It also invested in different kinds of equity shares, a large amount to the tune of Rs. 295.78 crores (rounded off) and as per the provision of Section 10(34), the prospective dividend income received from such investment is exempted from tax. This was perceived to be a diversion of business fund as the investment in equity shares bearing tax free returns was held not permissible by the Assessing Officer u/s 14A for the purpose of computing total income under this Chapter. No deduction is permissible in respect of the expenditure incurred by the assessee in relation to the income, which does not form part of the total income under the Act.

The Tribunal on considering the case of Maruti Udyog Ltd. (supra) did sustain the proposed disallowance u/s 14A of the Act. The Tribunal rightly held that the nexus between the borrowed fund and the investment can be said to be established only when the interest free funds are not available with the assessee. It further held that no nexus of such kind was proved before the Assessing Officer. Thus, when there was sufficient interest free funds available with the assessee and when the Department failed to establish the link between the borrowed fund and the investment made by the assessee in the equity shares, addition made on account of disallowance of Rs. 6,62,50,000/- by Assessing Officer has been rightly deleted by both the CIT(A) and the Tribunal.

It would be apt to refer to the decision of this Court rendered in the case of CIT v. Raghuvir Synthetics Ltd. [Tax Appeal No. 829 of 2007] where the question was of assessee having given interest free loans to the associates concerns when it was otherwise paying the interest on certain funds it had borrowed. Factually, when it was found that huge funds were available without any interest liability with the assessee and with no evidence to indicate that the borrowed money was utilized for the purpose of advancement of the sister concerns, the assessee was held eligible for allowance of the interest.

Reference is needed here to the judgment of the Delhi High Court in the case of Commissioner of Income Tax Vs. M/s Kribhco, wherein also similar question was answered in favour of the assessee and against the Revenue.

In view of the discussion made hereinabove, it is to be stated that it is expected of the Department to establish a nexus between the interest bearing funds borrowed and those invested by the assessee respondent. Only when it is shown that the interest free funds are not available with the assessee, the question would arise of fastening the tax liability on the assessee. In the instant case, the respondent assessee had not used borrowed funds, for the purpose of investment in equity shares. For the deduction claimed u/s 80M, on the dividend income of these shares, both the CIT (Appeals) and the Tribunal have rightly allowed the interest free expenses incurred for earning the dividend and allowed the deduction u/s 80M on the net income received. And, the Revenue having failed to establish that the respondent assessee had incurred any expenses for earning dividend income from the amount borrowed, they have rightly not added sum of Rs. 6.62 crores invoking provisions of Section 14A which does not permit deduction of expenditure incurred in relation to income not includible in total income. Resultantly, thus Tax Appeal merits no further consideration and the question of law proposed is answered as above.

Tax Appeal stands dismissed.