EICHER GOODEARTH LTD. v. THE CIT
[Citation -2015-LL-0514-3]

Citation 2015-LL-0514-3
Appellant Name EICHER GOODEARTH LTD.
Respondent Name THE CIT
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 14/05/2015
Assessment Year 1993-94, 1994-95
Judgment View Judgment
Keyword Tags business expenditure • gross dividend • interest expenditure • stock-in-trade
Bot Summary: Whether the Tribunal was correct in holding that expenditure under Section 36 of the Act was not linked to earning of dividend income ITA 54/2000 Page 1 2. The assessee is aggrieved by the decision of the Income Tax Appellate Tribunal which held that the interest expenditure incurred by it whilst repaying the loan borrowed for the purpose of subscribing all the rights issue of Eicher Tractors Ltd. during AY 1994-95 had to be dealt with and allowed if at all under Section 57 of the Income Tax Act, 1961. The ITAT rejected the assessee s contention that such interest by itself amounted to business expenditure and was properly admissible under Section 36 of the Income Tax Act, 1961. Learned counsel for the Revenue urged that even though the ITAT precluded consideration of the expenditure under Section 36 on the ground that shares were not held as stock-in-trade and such approach cannot be sustainable in law the assessee s claim did not receive proper scrutiny by the lower authorities. The judgments in Cocanada Radhaswami Bank and United Commercial Bank and the subsequent judgments in Western States Trading Ltd. v. CIT 80 ITR 21 and Brooke Bond Co. Ltd. v.CIT 162 ITR 372 are authorities that the heads of income enumerated in the Income Tax Act in Section 14 do not denote their essential characteristics. At the same time, we are also of the opinion that there has been inadequate consideration and discussion on this aspect before the lower authorities, particularly the AO and the CIT. As has been pointed out on behalf of the Revenue, at that stage, the parties were more concerned with whether net or gross expenditure had to be deducted under Section 80M. At the same time, the assessee, we notice did put his contention both to the CIT and ITAT. 10. If, as a result of the AO s determination, it is found that such expenditure is incurred, the net expenditure is obviously to be taken into consideration under Section 80M of the Act in the facts of the present case.


$ 1 * IN HIGH COURT OF DELHI AT NEW DELHI + ITA 54/2000 EICHER GOODEARTH LTD. ..... Appellant Through: Mr. Ajay Vohra, Sr. Advocate with Ms. Kavita Jha and Ms. Shraddha, Advocates. versus CIT ..... Respondent Through: Mr. N.P. Sahni, Sr. Standing Counsel with Mr. Nitin Gulati, Jr. Standing Counsel. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K.GAUBA ORDER % 14.05.2015 1. questions of law as framed originally were as follows: - 1. Whether Tribunal was justified in law in holding that assessee-appellant was entitled to deduction under Section 80M of Income-tax Act, 1961 in respect of net dividend and not gross dividend ? 2. Whether Tribunal was correct in holding that assessee s shares were stock-in-trade and not investment shares ? 3. Whether Tribunal was correct in holding that expenditure under Section 36 (1) (iii) of Act was not linked to earning of dividend income? ITA 54/2000 Page 1 2. In view of developments which have occurred during pendency of appeal, i.e., order passed by Assessing Officer for AY 1993-94 and 1994-95 where assessee s contentions have been dealt with and accepted in part so far as administrative expenditure is concerned and in view of order that we propose, detailed factual narrative is inessential. 3. assessee is aggrieved by decision of Income Tax Appellate Tribunal ( ITAT ) which held that interest expenditure incurred by it whilst repaying loan (of `6.5 Crores) borrowed for purpose of subscribing all rights issue of Eicher Tractors Ltd. during AY 1994-95 (year ending 31.3.1994) had to be dealt with and allowed if at all under Section 57 of Income Tax Act, 1961. In doing so, ITAT rejected assessee s contention that such interest by itself amounted to business expenditure and was properly admissible under Section 36 (1) (iii) of Income Tax Act, 1961. 4. It is agreed by counsel for parties that decision of Supreme Court in Distributors (Baroda) Pvt. Ltd. v. Union of India & Ors., 155 ITR 120 concludes first issue inasmuch as it is net dividend which is required to be taken into account under Section 80M read with Section 80AA of Income Tax Act, 1961. 5. second question according to us does not arise at all - view shared by counsel for both parties. 6. Counsel for assessee relies upon decisions of Supreme Court in CIT v. Cocanada Radhaswami Bank Ltd., (1965) 57 ITR 306 and United Commercial Bank v. CIT, (1957) 32 ITR 688. These decisions emphasized that head of income merely denotes ITA 54/2000 Page 2 or characterizes amount received as income but does not delineate income for purpose of its treatment especially when it relates to claim for interest. assessee s argument more specifically in this case is that it had to borrow `6.5 Crores for purpose of retaining control and interest in Eicher Tractors Ltd. Learned counsel argued that Eicher Tractors Ltd. is company closely related to assessee and has business nexus inasmuch as assessee provides managerial personnel for which it receives service fee as well as technical support by way of providing access to its R&D facilities. assessee, besides, also claims to receive license fee towards plant given to Eicher Tractors for carrying on its business activity. It is stated that furthermore products of Eicher Tractors Ltd. are exported by assessee. Such being case, assessee originally held and continued to hold shares in Eicher Tractors Ltd. when latter came out with rights issue. assessee felt compelled to subscribe to rights issue and resorted to borrowings. This was necessitated because had rights issue not been subscribed to, assessee claims that its shareholdings would have diminished or been diluted. 7. Learned counsel relied upon decision of Gujarat High Court in Addl. CIT v. Laxmi Agents P. Ltd. (1980) 125 ITR 227 to say that in such circumstances even though head of income derived, i.e., dividend would have to be dealt with and assessed under Section 56 (2) (i) of Act, nevertheless character of income being essentially business in nature, expenditure incurred has to be treated as such under Section 36 (1) (iii). He further relied upon ITA 54/2000 Page 3 decision of Calcutta High Court in CIT v. Rajeeva Lochan Kanoria, (1994) 208 ITR 616 where in somewhat similar circumstances, Court upheld assessee s contention that such expenditure, i.e., interest on borrowings had to be dealt with under Section 36 (1) (iii) and not under Section 57. Calcutta High Court on that occasion noticed previous authorities including judgments of Supreme Court. We also notice that this approach of recognizing need to deal with such expenses as business expenditure under Section 36 (1) (iii) had been approved and adopted by two Division Bench rulings of this Court in CIT v. Tulip Star Hotels Ltd., (2011) 16 Taxmann 335, Commissioner of Income Tax v. Excellent Commercial Enterprises & Investments Ltd. (2005) 147 Taxman 558 and Commissioner of Income Tax v. Oriental Structural Engineers (P) Ltd. (2013) 35 Taxmann 210. 8. Learned counsel for Revenue urged that even though ITAT precluded consideration of expenditure under Section 36 (1) (iii) on ground that shares were not held as stock-in-trade and such approach cannot be sustainable in law, nevertheless, assessee s claim did not receive proper scrutiny by lower authorities. Learned counsel highlighted that CIT (A) as well as ITAT went by whether gross expenditure was net expenditure had to be taken into consideration while making deductions under Section 80M. It was submitted that in these circumstances, it would not be proper for this Court to render findings that investments in this case made from borrowings were in fact on account of strategic compulsions and not merely to derive income by way of dividends. ITA 54/2000 Page 4 9. judgments in Cocanada Radhaswami Bank and United Commercial Bank (supra) and subsequent judgments in Western States Trading (P) Ltd. v. CIT (1971) 80 ITR 21 and Brooke Bond & Co. Ltd. v.CIT (1986) 162 ITR 372 are authorities that heads of income enumerated in Income Tax Act in Section 14 do not denote their essential characteristics. In other words that business or individual receives some amount which may be assessed as income of particular kind would not be conclusively determinative of that character. In facts of present case, that principle, in opinion of Court, would squarely apply. If indeed assessee had invested and subscribed to rights issue in order to retain control it originally did in Eicher Tractors Ltd, it can still be said that expenditure was towards promotion of business and, therefore, properly entitled to be treated as such under Section 36 (1) (iii). At same time, we are also of opinion that there has been inadequate consideration and discussion on this aspect before lower authorities, particularly AO and CIT (A). As has been pointed out on behalf of Revenue, at that stage, parties were more concerned with whether net or gross expenditure had to be deducted under Section 80M. At same time, assessee, we notice did put his contention both to CIT (A) and ITAT. 10. This Court, therefore, is of opinion that law as declared by Supreme Court in such cases is that if expenditure is incurred for purpose of promotion of business- more specifically as in facts of this case to retain control or as part of strategic investment of assessee/company, such expenses by way of ITA 54/2000 Page 5 interest outgo would have to be treated under Section 36 (1) (iii) and not under Section 57. matter is, therefore, remitted to AO for full appraisal of fact situation and findings in light of our conclusions. If, as result of AO s determination, it is found that such expenditure is incurred, net expenditure is obviously to be taken into consideration under Section 80M of Act in facts of present case. 11. appeal is partly allowed to above extent. S. RAVINDRA BHAT, J R.K.GAUBA, J MAY 14, 2015 /vikas/ ITA 54/2000 Page 6 EICHER GOODEARTH LTD. v. CIT
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