Siva Industries & Holdings Ltd vs. ACIT (ITAT Chennai)

No s. 14A disallowance if assessee has no tax-free income

The Tribunal had to consider two issues (i) whether where investments are made in shares funded partly by borrowings, the interest on the borrowings can be disallowed u/s 14A even if no tax-free dividend has been received on the said shares and (ii) if an Indian company advances funds to its off-shore AE, the arms’ length price of the transaction has to determined by applying the Prime Lending Rate (PLR) or the LIBOR. HELD:

(i) S. 14A uses the words “for the purpose of computing the total income under this Chapter ……. expenditure incurred in relation to income which does not form part of the total income under this Act”. Thus for the applicability of s. 14A there must be (a) taxable income and (b) tax-free income. If either one is absent, s. 14A has no applicability. If it is assumed that s. 14A would apply even when the assessee does not have tax-free income, the expenditure would get disallowed year after year so long as the assessee held the shares and if he sold them and made a capital gain, that would be taxed as well. This is not contemplated by s. 14A. If there is no claim for tax-free income, there cannot be any disallowance u/s 14A (Walfort Share and Stock Brokers 326 ITR 1 (SC), Godrej & Boyce 328 ITR 81 (Bom) & Winsome Textile 319 ITR 204 (P&H) referred);

(ii) If the transaction of lending monies between the assessee and the AE is in foreign currency and the transaction is an international transaction, it has to be evaluated by applying the commercial principles applicable to international transaction. So, the PLR would have no applicability and the international rate being LIBOR has to be considered while determining the arm’s length interest rate in respect of the transaction between the assessee and the AE. As the rate charged by the assessee (6%) was higher than the LIBOR (4.42) no adjustment could be made though the PLR was higher at 11.75%.