M/s. ULTRAMARINE & PIGMENTS LTD., MUMBAI v. ADDL. CIT 7(3), MUMBAI

ITA 2775/MUM/2005 | 2001-2002
Pronouncement Date: 30-12-2011 | Result: Partly Allowed

Appeal Details

RSA Number 277519914 RSA 2005
Assessee PAN AAACU0718Q
Bench Mumbai
Appeal Number ITA 2775/MUM/2005
Duration Of Justice 6 year(s) 8 month(s) 15 day(s)
Appellant M/s. ULTRAMARINE & PIGMENTS LTD., MUMBAI
Respondent ADDL. CIT 7(3), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 30-12-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 30-12-2011
Assessment Year 2001-2002
Appeal Filed On 15-04-2005
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH MUMBAI BEFORE SHRI D. MANMOHAN VICE PRESIDENT AND SHRI J. SUDHAKAR REDDY JUDICIAL MEMBER ITA NO. 2775/MUM./2005 (ASSESSMENT YEAR : 2001-02 ) ULTRAMARINE & PIGMENTS LTD. THIRUMALAI HOUSE PLOT NO.101/102 ROAD NO.29 SION (E) MUMBAI 400 022 PAN AAACU0718Q .. APPELLANT V/S ASSTT. COMMISSIONER OF INCOME TAX CIRCLE-7(3) AAYAKAR BHAVAN 101 M.K. ROAD MUMBAI 400 020 .... RESPONDENT ITA NO. 3395/MUM./2005 (ASSESSMENT YEAR : 2001-02 ) ASSTT. COMMISSIONER OF INCOME TAX CIRCLE-7(3) AAYAKAR BHAVAN 101 M.K. ROAD MUMBAI 400 020 .. APPELLANT V/S ULTRAMARINE & PIGMENTS LTD. THIRUMALAI HOUSE PLOT NO.101/102 ROAD NO.29 SION (E) MUMBAI 400 022 PAN AAACU0718Q .... RESPONDENT ASSESSEE BY : MR. HIRO RAI REVENUE BY : MR. A.C. TEJPAL DATE OF HEARING 28.11.2011 DATE OF ORDER 30.12.2011 ULTRAMARINE & PIGMENTS LTD. ITA NO. 2775/MUM./2005 ITA NO.3395/MUM./2005 2 O R D E R PER J. SUDHAKAR REDDY A.M. THESE CROSS APPEALS WERE RESTORED TO THE FILE OF T RIBUNAL BY THE HON'BLE JURISDICTIONAL HIGH COURT VIDE ITS JUDGMENT DATED 8 TH FEBRUARY 2011 PASSED IN INCOME TAX APPEAL NO.467 OF 2010. A PERUSAL OF T HE JUDGMENT PASSED BY THE HON'BLE JURISDICTIONAL HIGH COURT DISCLOSES THA T TWO QUESTIONS ONLY REQUIRE ADJUDICATION AFRESH BY THE TRIBUNAL. THE FI RST 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 TRIB UNAL IN ITS ORDER DATED 16 TH APRIL 2009 ARE EXTRACTED BELOW FOR READY REFERENC E:- 2. WE FIRST TAKE UP THE ISSUE RELATING TO DISALLOWA NCE OF INTEREST WHICH IS COMMON IN ALL THE APPEALS I.E. IN THE APPE ALS 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 BEL ONGS TO THIRUMALI GROUP. ANOTHER COMPANY OF THE SAME GROUP I.E THIRUM ALAI CHEMICALS LTD. (TCL) HAD FORMED A JOINT VENTURE WITH AN AUSTR ALIAN COMPANY NAMED AS THIRUMALAI CHEMICAL INDUSTRIES LTD. (MALAY SIA) (TCLIM). THE JOINT VENTURE HAD BEEN FORMED FOR MANUFACTURING OF MALEIC ANHYDRIDE. INITIALLY TCL HAD 25% SHARE HOLDING IN THE JOIN VEN TURE. THE JOINT VENTURE HAD BEEN INCURRING LOSSES SINCE 1999. 2.1 DURING THE ASSESSMENT YEAR 2001-02 THE ASSESSE E HAD TAKEN SHORT TERM LOAN OF RS.9 CRORES ON 9.6.2000 FROM EXI M BANK TO MEET THE SHORT TERM FINANCIAL NEEDS ON WHICH INTEREST CO ST OF RS.78 72 653/- HAD BEEN INCURRED. THE ASSESSEE HAD ALSO BEEN SANCT IONED LONG TERM LOAN OF ` 7 CRORES VIDE LETTER DATED 5.6.2000 OF EXIM BANK A ND THE PURPOSE OF THE LOAN WAS TO PART FINANCE THE ASSESSE ES EQUITY INVESTMENT IN TCLIM. INTEREST EXPENDITURE INCURRED DURING THE YEAR ON THIS ACCOUNT WAS RS.67 14 246/-. THE AO ON EXAMINAT ION 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 C HEQUE OF RS.8 98 00 000/- FOR INVESTMENT IN 76 00 000 ORDINA RY 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/- A ND THE CLOSING BALANCE AFTER CONSIDERING THE LOAN RECEIVED AND THE PAYMENT FOR ACQUISITION OF SHARES WAS RS.3 03 744/- MAKE IT CLE AR THAT ALMOST ULTRAMARINE & PIGMENTS LTD. ITA NO. 2775/MUM./2005 ITA NO.3395/MUM./2005 3 ENTIRE LOAN HAD BEEN UTILIZED FOR ACQUISITION OF SH ARES. THE AO ALSO NOTED THAT SHAREHOLDING OF THE GROUP IN TCLIM BEFOR E THE INVESTMENT WAS 49.71% AND AFTER THE ACQUISITION OF SHARES SHAR E HOLDING WENT UP TO 59.6L% WHICH CONSISTED OF 39.93% BY TCL AND 19.6 8% BY ULTRAMARINE & PIGMENTS LTD. I.E. THE ASSESSEE. TCLI M HAD INCURRED OPERATING LOSS RL 5.9 MILLION AND NET LOSS OF RL 12 .2 MILLION FOR THE YEAR ENDING 31.3.2000. THE ASSESSEE HAS NOT RECEIVE D 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 D IVIDEND INCOME HAD BEEN RECEIVED AND INVESTMENT HAD BEEN MADE FOR ACQU IRING CONTROLLING STAKE IN THE JOINT VENTURE. THE ASSESSEE EXPLAINED THAT IN THE FIRST YEAR TCLIM HAD EARNED PROFIT BUT WAS INCURRING LOSSES FR OM 1999 DUE TO SOUTH EAST ASIAN CRISIS AND SEVERE COMPETITION IN T HE INDUSTRY. IT WAS ALSO SUBMITTED THAT THE ASSESSEE WOULD RECEIVE DIVI DEND AS AND WHEN THE COMPANY MADE PROFIT IN FUTURE. IT WAS ARGUED TH AT THE ASSESSEE HAD SHAREHOLDING OF ONLY 19.68% AND THEREFORE INVES TMENT WAS NOT FOR GAINING CONTROL BY THE ASSESSEE. THE ASSESSEE PLEAD ED THAT INVESTMENT IN SHARES BY OTHER GROUP COMPANIES SHOULD NOT BE IN CLUDED WHILE CONSIDERING THE CONTROLLING STAKE. THE AD HOWEVER D ID NOT ACCEPT THE EXPLANATION OF THE ASSESSEE. IT WAS NOTED BY HIM TH AT THE ASSESSEE HAD 22.7% SHARE HOLDING IN TCL AND MD OF THE ASSESS EE COMPANY WAS ON THE BOARD OF THAT COMPANY. SIMILARLY CHAIRMAN AN D MD OF THE TCL WAS ALSO ON THE BOARD OF THE ASSESSEE COMPANY. AD F URTHER OBSERVED THAT TCLIM HAD INCURRED LOSS IN SUBSEQUENT YEARS AL SO. THE AD ACCORDINGLY HELD THAT THE PURPOSE FOR ACQUISITION O F SHARES BY THE ASSESSEE WAS NOT TO EARN DIVIDEND BUT IT WAS ONLY F OR HAVING CONTROLLING STAKE OF THE GROUP IN THE SAID COMPANY. HE REFERRED TO THE JUDGMENT OF HONBLE HIGH COURT OF MUMBAI IN CASE OF AMRITABEN R. SHAH (238 ITR 777) IN WHICH IT WAS HELD THAT IN CAS E THE PURPOSE OF INVESTMENT WAS FOR ACQUIRING CONTROLLING STAKE INT EREST 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 INVE STMENT IN SHARES OF TCLIM ASSESSEE HAD ALSO MADE INVESTMENT IN SHAR ES OF OTHER COMPANIES AGGREGATING RS.13 47 51 474/- OUT OF WHIC H SUM OF RS.13 47 49 624/- WAS REPRESENTED BY THE INVESTMENT MADE IN THE EQUITY SHARES OF TCL THE GROUP COMPANY AND ASSESSE E HAD RECEIVED TOTAL DIVIDEND OF ` 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 INTERES T ON BORROWINGS INVESTED IN SHARES SHOULD NOT BE DISALLOWED. THE AS SESSEE EXPLAINED THAT INVESTMENT IN SHARES WAS NOT OUT OF BORROWED F UNDS 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 LA CS. THE AO HOWEVER NOTED THAT THE ASSESSEE WAS NOT MAINTAINING ANY SEPARATE BANK ACCOUNT FOR INVESTMENTS IN SHARES. THERE WAS I NTERMIXING OF OWN FUND AND BORROWED FUND. THE ASSESSEE COULD NOT PROV E THAT BORROWED FUNDS WERE UTILIZED FOR MAKING INVESTMENTS IN SHARE S. HE THEREFORE DID ULTRAMARINE & PIGMENTS LTD. ITA NO. 2775/MUM./2005 ITA NO.3395/MUM./2005 4 NOT ACCEPT THE EXPLANATION THAT BORROWED FUNDS WAS NOT UTILIZED FOR MAKING INVESTMENT IN SHARES. IT WAS NOTED BY HIM TH AT 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/-. H E THEREFORE ALLOCATED THE INTEREST TOWARDS INVESTMENT IN SHARES IN THE RATIO OF INVESTMENT TO CAPITAL EMPLOYED. CAPITAL EMPLOYED AS PER THE BOOKS WAS ` 60 93 57 615/-. ACCORDINGLY HE COMPUTED THE PROPOR TIONATE INTEREST OF ` 46 89 714/- WHICH HE ALLOCATED IN INVESTMENT IN SH ARES. 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 BASI S. HOWEVER HE OBSERVED THAT THIS BASIS SHOULD BE ADOPTED IN RESPE CT 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 O THER INVESTMENTS IN SHARES AS PER CIT(A) MUST ALSO HAVE BEEN MADE FOR T HE PURPOSE OF RETAINING THE CONTROLLING INTEREST AND NOT FOR ANY DIVIDEND AND THEREFORE IT WAS HELD BY HIM THAT PROPORTIONATE INT EREST SHOULD BE DISALLOWED IN THE RATIO OF TOTAL INVESTMENTS IN SHA RES TO THE CAPITAL EMPLOYED. AGGRIEVED BY THE DECISION OF THE CIT(A) B OTH THE PARTIES ARE IN APPEAL. THE ASSESSEE IS IN DISPUTE AGAINST THE D ECISION OF CIT(A) UPHOLDING SOME DISALLOWANCE IN RELATION TO INVESTME NT IN SHARES IN TCLIM & TCL. THE REVENUE IS AGGRIEVED BY THE DECISI ON OF CIT(A) TO DISALLOW THE INTEREST ONLY ON PROPORTIONATE BASIS. 3. GROUNDS NO.1 AND 2 OF THE ASSESSEES APPEAL AND GRO UND NO.1 OF REVENUES APPEAL ARE ON THE ISSUE OF DISALLOWANCE O F CLAIM MADE ON INTEREST PAID ON LOAN TAKEN TO PART FINANCE THE ASSESSEES E QUITY INVESTMENT IN TCLIM. THE HONBLE HIGH COURT ON AN AGREEMENT BETW EEN BOTH THE PARTIES CAME TO A CONCLUSION THAT THE JUDGMENT IN CIT V/S A MRITABEN SHAH [1999] 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 ASS ESSEE SUBMITTED THAT THE ASSESSEE BORROWED MONEY AND MADE INVESTMEN T IN A MALASIAN COMPANY INCOME FROM WHICH WAS TAXABLE UNDER THE AC T. HE POINTED OUT THAT THE DIVIDEND INCOME RECEIVED FROM DOMESTIC COMPANIE S ARE EXEMPT UNDER SECTION 10(34) OF THE ACT AND THIS EXEMPTION DOES N OT 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 T HAT THE ASSESSEE HAS ULTRAMARINE & PIGMENTS LTD. ITA NO. 2775/MUM./2005 ITA NO.3395/MUM./2005 5 BORROWED AMOUNTS FROM EXIM BANK FOR MAKING INVESTME NT IN TCLIM IS NOT IN DISPUTE. HE POINTED OUT THAT THE GROUND ON WHICH TH E ASSESSING OFFICER MADE DISALLOWANCE WAS THAT THE ASSESSEE HAD PURCHASED SH ARES 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 P VT. LTD. [1994] 208 ITR 13 (BOM.) FOR THE PROPOSITION THAT INTEREST PAID ON B ORROWINGS 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 PU RCHASED MAJORITY OF SHARES OF ANOTHER COMPANY KNOWN AS ASSOCIATE BOMBAY CINEMA S LTD. WHICH WAS RUNNING THE STRAND CINEMA IN BOMBAY. HE FURTHER REL IED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN CIT V/S RAJENDRA PRASAD MO ODI [1978] 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 E ARNED. 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 I NVESTMENT 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 CI T V/S PHIL CORPN. LTD. [2011] 202 TAXMAN 368 (BOM.) FOR THE PROPOSITION T HAT THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION OF INTEREST PAID ON OVERDR AFT UNDER SECTION 36(1)(III) EVEN IF THE ASSESSEE HAD INVESTED THE AMOUNT IN QUE STION FOR HAVING CONTROL OVER MAJORITY OF SHARES BUT NOT TO EARN DIVIDEND. H E RELIED ON THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN ORMERODS (I NDIA) P. LTD. V/S CIT [1959] 036 ITR 0329 (BOM.) FOR THE PROPOSITION THA T WHEN MONEY IS BORROWED FOR PURCHASE OF SHARES AND NO DIVIDEND INC OME IS EARNED INTEREST ON BORROWED MONEY SHOULD BE SET-OFF AGAINST OTHER I NCOME. 5. AS REGARDS GROUND NO.1 I.E. DISALLOWANCE UNDER SE CTION 14A OF THE ACT THE LEARNED COUNSEL SUBMITTED THAT IN NORMAL COURSE THE ISSUE SHOULD BE RESTORED TO THE FILE OF ASSESSING OFFICER FOR AD JUDICATION AFRESH BUT HIS CASE IS THAT THE TRIBUNAL IN ASSESSEES OWN CASE FO R THE EARLIER ASSESSMENT YEAR 1996-97 TO 2000-01 HAS ON IDENTICAL FACTS C OME TO A CONCLUSION THAT THE ASSESSEE HAS OWN FUNDS WHICH WERE INVESTED IN S HARES AND THAT THE INVESTMENTS DURING THE YEAR IS LESS THAN THE PROFIT S EARNED BY THE ASSESSEE ULTRAMARINE & PIGMENTS LTD. ITA NO. 2775/MUM./2005 ITA NO.3395/MUM./2005 6 DURING THE YEAR. HE SUBMITTED THAT DURING THE YEAR THERE IS NO ADDITIONAL INVESTMENT IN SHARES OF INDIAN COMPANY. HE RELIED O N THE FINDINGS OF THE TRIBUNAL FOR THE EARLIER ASSESSMENT YEARS AS WELL A S THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN K. RAHEJA CORPORATION PVT. LTD. IN INCOME TAX APPEAL NO.1260 OF 2009 JUDGMENT DATED 8 TH AUGUST 2011 FOR THE PROPOSITION THAT WHEN INVESTMENTS ARE MADE OUT OF A SSESSEES OWN FUNDS AND NOT OUT OF BORROWED FUNDS NO DISALLOWANCE 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 ATTRIB UTED ANY EXPENDITURE TO THE EARNING OF DIVIDEND AND A REASONABLE AMOUNT MAY BE DISALLOWED. HE RELIED ON THE DECISION OF MUMBAI B OF THE TRIBUNA L IN BUNGE AGRIBUSINESS (I) PVT. LTD. V/S DCIT [2011] 132 ITD 549 (MUM.). 6. LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER H AND CONTROVERTED SUBMISSIONS OF THE LEARNED COUNSEL AND SUBMITTED TH AT THERE WAS NO EXPLANATION GIVEN AS TO WHY THE ASSESSEE HAS BORROW ED HUGE FUNDS FOR MAKING INVESTMENT IN A LOSS MAKING COMPANY SITUATED IN FOREIGN COUNTRY. HE POINTED OUT THAT THE ASSESSEE WAS ALREADY HOLDING 4 9% OF THE FOREIGN COMPANY AND WANTED TO ACQUIRE 2/3 RD 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 CAN NOT BE ALLOWED AS A DEDUCTION UNDER SECTION 36(1)(III) OR UNDER SECTION 57 (III). HE SUBMITTED THAT THE PROVISIONS FOR DOUBLE TAXATION AVOIDANCE AGREEM ENT 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 DISALLOWANCE THE LEARNED DEPARTMENTAL REPRESENTATI VE SUBMITTED THAT THE ISSUE SHOULD BE RESTORED TO THE FILE OF ASSESSING O FFICER FOR ADJUDICATION AFRESH IN THE LIGHT OF THE HON'BLE JURISDICTIONAL H IGH COURTS JUDGMENT IN GODREJ & BOYCE MFG. CO. LTD. V/S DCIT (2010) 328 ITR 081 (BOM.). 7. IN REPLY THE LEARNED COUNSEL SUBMITTED THAT THE AS SESSEE IS AN INDIAN COMPANY AND IS LIABLE TO TAX IN RESPECT OF TOTAL WO RLD INCOME. HIS CASE IS THAT THE INCOME FROM DIVIDEND RECEIVABLE FROM THE MALAYS IAN COMPANY WOULD BE TAXABLE IN INDIA UNDER THE HEAD INCOME FROM OTHER SOURCES AND THAT ULTRAMARINE & PIGMENTS LTD. ITA NO. 2775/MUM./2005 ITA NO.3395/MUM./2005 7 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 T HE SAID DIVIDEND IS NOT TAXABLE IN INDIA. HE SUBMITTED THAT UNDER SECTION 9 0(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 ENTITLE D TO DEDUCTION ON MONEY BORROWED AND INVESTED IN SHARES OF A MALAYSIA COMPA NY FOR THE PURPOSE OF EARNING DIVIDEND. HE ACCORDINGLY PRAYED FOR RELIE F. 8. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON A PERUSAL OF THE P APERS ON RECORD AS WELL AS THE CASE LAWS CITED BEFORE US WE HOLD AS FOLLOW S:- 9. GROUNDS NO.1 AND 2 OF ASSESSEES APPEAL AND GROUND NO.1 OF REVENUES APPEAL ARE ON THE ISSUE OF ALLOWABILITY OF INTEREST UNDER SECTION 57(III) ON AMOUNTS BORROWED FROM EXIM BANK FOR THE PURCHASE O F SHARES IN TCLIM WHICH IS A MALAYSIAN COMPANY. THE ASSESSEE HAD TAKE N 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 JURISDI CTIONAL HIGH COURT IN AMRITABEN SHAH (SUPRA) HAS NO APPLICATION TO THE F ACTS OF THE CASE. IN VIEW OF THIS SPECIFIC CONCESSION GIVEN BY THE REVENUE W E NOW CONSIDER THE OTHER CASE LAWS RELIED ON DURING THE COURSE OF HEARING AN D 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 WH ICH THE ASSESSEE EXPECTED TO RECEIVE DIVIDENDS AND HENCE TH E 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 SHAR ES OF THE MANAGED COMPANY W CO. WAS ALLOWABLE DEDUCTION UNDER SECTIO N 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 ACQUISITIO N OF SHARES OF A CO. ULTRAMARINE & PIGMENTS LTD. ITA NO. 2775/MUM./2005 ITA NO.3395/MUM./2005 8 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 THER EON DURING THE ACCOUNTING PERIOD RELEVANT TO THE ASSESSMENT YEAR B UT DID NOT RECEIVE ANY DIVIDEND ON THE SHARES PURCHASED WITH THOSE MON IES: HELD ACCORDINGLY THAT THE INTEREST ON MONIES BORROWED F OR INVESTMENT IN SHARES WHICH HAD NOT YIELDED ANY DIVIDEND WAS ADMIS SIBLE AS A DEDUCTION UNDER SECTION 57(III) OF THE ACT IN COMP UTING ITS INCOME FROM DIVIDEND UNDER THE HEAD INCOME FROM OTHER SOU RCES . 12. THE HON'BLE JURISDICTIONAL HIGH COURT IN ORMERODS ( INDIA) P. LTD. (SUPRA) HELD AS FOLLOWS:- HELD (I) THAT THE WORD PURPOSE IN THE EXPRESSIO N EXPENDITURE INCURRED SOLELY FOR THE PURPOSE OF MAKING OR EARNIN G SUCH INCOME PROFITS OR GAINS IN SECTION 12(2) OF THE INCOME-TA X 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 SHARE S 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 WH EREAS THE PURPOSE OF THE PURCHASE WAS A ENTIRELY DIFFERENT MATTER; (II) THAT THE ONLY CONCLUSION ON THE FACTS WAS TH AT THESE INVESTMENTS WERE MADE FOR THE PURPOSE OF EARNING INCOME OR DIVI DENDS OR FOR MAKING PROFITS OR GAINS; (III) THAT THEREFORE THE INTEREST PAID BY THE ASS ESSEE ON MONEYS BORROWED FOR THE PURCHASE OF SHARES COULD BE SET OF F 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 W AS NOT OPERATED ONLY FOR INVESTING IN THE SHARES OF SUBSIDIARY COMP ANY 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 OVER DRAFT WAS NOT SUSCEPTIBLE OF BIFURCATION AND THEREFORE THE ASSE SSEE WAS ENTITLED TO THE DEDUCTION UNDER SECTION 36(1)III). ULTRAMARINE & PIGMENTS LTD. ITA NO. 2775/MUM./2005 ITA NO.3395/MUM./2005 9 14. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS NOT BRO UGHT BEFORE US ANY CONTRARY DECISION. HIS ARGUMENT THAT THE AMOUNT S 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 MAL ASIA WOULD DISENTITLE THE DEDUCTION WE AGREE WITH THE SUBMISSI ONS OF THE ASSESSEE THAT THE WHOLE WORLD INCOME IS TAXABLE IN THE HANDS OF T HE ASSESSEE UNDER THE PROVISIONS OF THE ACT AND WHEN IT IS DONE SO SECTI ON 90(2) MANDATES THAT THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT TH EY 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 LEAR NED 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 INC OME 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 CONTRAR Y DECISIONS ARE CITED BY THE REVENUE WE ARE BOUND BY THE JUDGMENTS OF HO N'BLE JURISDICTIONAL HIGH COURT CITED BY THE ASSESSEE. CONSEQUENTLY WE ALLOW THE CLAIM OF THE ASSESSEE THE INTEREST PAID ON BORROWED FUNDS UTILI SED 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 REVENUES AP PEAL IS DISMISSED. 17. COMING TO GROUND NO.2 IN ASSESSEES APPEAL I.E. D ISALLOWANCE UNDER SECTION 14A WE FIND THAT THE ` TRIBUNAL IN ASSESSE ES OWN CASE FOR ASSESSMENT YEARS 1996-97 1998-99 1999-2000 AND 20 00-01 IN ITA NO.2987 TO 2989/ MUM./2005 AND IN ITA NO.2774/MUM./ 2005 ORDER DATED 2 ND SEPTEMBER 2008 AT PARAS-11 AND 12 / PAGES-13 AND 14 HELD AS FOLLOWS:- ON A CAREFUL CONSIDERATION OF THE FACT WE FIND TH AT THE EQUITY SHARE CAPITAL AND RESERVES OF THE COMPANY WHICH ARE NOT I NTEREST BEARING FUNDS ARE FAR IN EXCESS OF THE AMOUNTS INVESTED IN THE SHARES OR THE ULTRAMARINE & PIGMENTS LTD. ITA NO. 2775/MUM./2005 ITA NO.3395/MUM./2005 10 AMOUNTS .FINANCED TO M/S THIRUMALA CHEMICALS LTD. A T PARAGRAPH 4 OF THE ASSESSEES PAPER BOOK A CHART HAS BEEN PROVIDED WHICH PROVES THAT THE ASSESSEE HAS SUFFICIENT FUNDS IN THE FORM OF CAPITAL AND RESERVES AND THE DISALLOWANCE IN QUESTION IS NOT CA LLED FOR. THE ASSESSEE HAS RIGHTLY PLACED RELIANCE ON THE JUDGMEN T OF THE HONBLE SUPREME COURT IN THE CASE OF MUNJAL SALES CORPORATI ON VS CIT 298 ITR 298 (SC) WHEREIN IT HAS BEEN HELD THAT SINCE THE OP ENING 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 ASSESSEES OWN F UNDS. IN THIS CASE ALSO THE INCREMENTAL INVESTMENTS ARE MUCH LESSER TH AN THE PROFIT AFTER TAX EARNED DURING THE RESPECTIVE ASSESSMENT YEAR AN D 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 HA S RIGHT WHEN IT FOUND THAT THE CAPITAL OF THE FIRM AND INTEREST FRE E UNSECURED LOANS WITH THE ASSESSEE FAR EXCEEDED THE AMOUNTS ADVANCE D TO SISTER CONCERNS IN ALL THE YEARS UNDER APPEAL. IT ALSO HEL D THAT THE REVENUE HAD NOT POINTED OUT ANY SPECIFIC INTEREST BEARING B ORROWED FUNDS WHICH HAVE BEEN DIVERTED BY THE ASSESSEE TO THE SISTER CO NCERNS AND HENCE THE DISALLOWANCE IS BAD IN LAW. SIMILAR IS THE DECI SION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT V/S HOTEL SAVE RA 239 ITR 795. THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF MARUTI UDYOG L TD 92 LTD 119 ON PAGE 121 HELD AS FOLLOWS: SECTION 14A READ WITH SECTION 36(1)(III) OF THE IN COME- 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 I NVESTED IN SHARES YIELDING TAX-FREE INCOME ASSESSING OFFI CER RELYING ON SECTION 14A CALCULATED INTEREST ON TOTA L INVESTMENT IN SHARES AND MADE DISALLOWANCE COMMISSIONER (APPEALS) ALSO HELD THAT THERE WAS DIR ECT NEXUS BETWEEN FUNDS BORROWED AND INVESTMENT IN SHAR ES YIELDING TAX-FREE INCOME BUT MADE DISALLOWANCE ON DAY TO DAY WORKING PRODUCT METHOD WHETHER NEXUS BETWEEN BORROWED FUNDS AND INVESTMENT CAN BE SAID T O BE ESTABLISHED ONLY WHERE IT IS SHOWN THAT INTEREST FREE FUND ARE NOT AVAILABLE WITH ASSESSEE HELD YES WHETHER SINCE COMMISSIONER (APPEALS) HAD MERELY PIC KED UP SOURCES ON WHICH INTEREST WAS PAID BY ASSESSEE A ND HAD COMPLETELY IGNORED OTHER SOURCES AND FURTHER TH AT 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 W ITHOUT BRINGING ANYTHING ON RECORD TO SHOW NEXUS IS BAD IN LAW. RES PECTFULLY FOLLOWING THESE CASE LAWS AND AS THE REVENUE HAS FAILED TO DE MONSTRATE ANY ULTRAMARINE & PIGMENTS LTD. ITA NO. 2775/MUM./2005 ITA NO.3395/MUM./2005 11 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 LOAN S OR INVESTMENTS DURING THE YEAR. THE HON'BLE JURISDICTIONAL HIGH CO URT IN K. RAHEJA CORPORATION PVT. LTD. (SUPRA) LAID DOWN THAT WHEN T HE REVENUE CANNOT POINT OUT AS TO HOW INTEREST ON BORROWED FUNDS WAS ATTRIB UTABLE TO THE EARNING OF DIVIDEND INCOME WHICH WAS EXEMPT UNDER SECTION 10(3 3) OF THE ACT (AS IT THEN STOOD) NO DISALLOWANCE CAN BE MADE. IT LAID D OWN 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 ASSESSE E 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 THE RE IS NO INCREMENTAL INVESTMENT IN SHARES DURING THE YEAR. UNDER THESE C IRCUMSTANCES WE AGREE WITH THE CONTENTION OF THE ASSESSEE. AS CERTAIN EXP ENDITURES CAN REASONABLY BE ESTIMATED AND DISALLOWED UNDER SECTION 14A AS A GREED 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 REVENUES APPEAL IS DISMISSED. 20. TO SUM UP ASSESSEES APPEAL IS PARTLY ALLOWED AND REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30.12.2011 SD/- D. MANMOHAN VICE PRESIDENT SD/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI DATED: 30.12.2011 ULTRAMARINE & PIGMENTS LTD. ITA NO. 2775/MUM./2005 ITA NO.3395/MUM./2005 12 COPY TO : (1) THE ASSESSEE; (2) THE RESPONDENT; (3) THE CIT(A) MUMBAI CONCERNED; (4) THE CIT MUMBAI CITY CONCERNED; (5) THE `DR C BENCH ITAT MUMBAI. TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT MUMBAI BENCHES MUMBAI DATE INITIAL 1. DRAFT DICTATED ON 13.12.2011 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 15-19.12.11 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 20.12.2011 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 20.12.2011 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 20.12.2011 SR.PS 6. DATE OF PRONOUNCEMENT 30.12.2011 SR.PS 7. FILE SENT TO THE BENCH CLERK 30.12.2011 SR.PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER