TMI Blog2004 (8) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... part of total income, which was dividend in this case. He further held that the interest expenditure could also be not allowed if the interest bearing loans had been diverted for non-income bearing advances, the nexus of which was clearly proved in this case. 3. The assessee by letter dated 26-2-2002 stated that the expenditure by way of interest was mainly on investment of shares particularly when the dividend was taxable; that after amendment also, the dividend was still taxable and only the procedure for collection of taxes has been shifted from the shareholders to the company; that the expenditure was also otherwise allowable from the income earned by way of surplus on the sale of shares and this surplus was also considered as income under the IT Act and if the expenditure incurred is allowable under one head which results into income under other head, should not be disallowed because ultimately the income earning capacity of that asset should be considered; that such investment also results into and is co-linked with the earning of remuneration, which is also offered for taxation; and that out of total liabilities of Rs. 134 lacs only Rs. 50 lacs was interest bearing liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of the facts as discussed above the contentions of the assessee were not found to be acceptable and the same was intimated to him vide letter dated 4-3-2002 which was served on 5-3-2002. However, as requested by him one more opportunity was provided to him and he was requested to personally appear before the undersigned on 11-3-2002 at 11.00 a.m. to discuss any other fresh issue, if he has any, in this regard. The assessee was also requested to furnish complete details/bifurcation in respect of his claim regarding non income earning assets being Rs. 16.12 lacs only out of total interest bearing liabilities of Rs. 50 lacs as no details thereof were furnished by him. In response to this the assessee did not appear personally but furnished a letter dated 9-3-2002 through his employee. In this letter the assessee has raised no new issue and he has merely repeated the same contentions which raised by him in the letter furnished on 26-2-2002. These contentions of the assessee have already been rejected as limited to him vide letter dated 4-3-2002. The assessee has also not furnished any details/evidences regarding his claim of non interest bearing assets being Rs. 16.12 lacs only. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not in the case of capital gain but, was in respect of exempted income. Considering the provision of section 14A r.w.s. 10(33) 115-O the interest claimed by the assessee he held cannot be allowed because the interest bearing loan had been utilized for making investment in the relation to exempted income. He therefore confirmed the disallowance made by the Assessing Officer amounting to Rs. 5,69,739. 6. The learned counsel of the assessee Shri S.N. Soparkar submitted that dividend though not taxable directly in the hands of the assessee, it is assessed in the hands of company and, therefore, section 14A has no application. Reliance is placed on the decision of the Bombay Bench of the Tribunal in the case of Mafatlal Holdings Ltd. [IT Appeal No. 2935 (Mum.) of 2002 for assessment year 1998-99 dated 23-4-2003]. The facts and circumstances of that case are similar to the facts of the impugned case and therefore he submitted that Tribunal following that view should allow the claim of the assessee and should not take a contrary view of the matter. He further submitted that originally when the investment was made in shares the interest at that time was relating to taxable income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nct and separate entities and the tax paid by the company does not per se makes the dividend a part of shareholder's total income. He further submitted that an intimation under section 143(1) is not an assessment and therefore the question of enhancement of income or rectification thereof does not arise. When the interest is claimed this year and when dividend is not part of total income of this year the fact that it was taxable when acquired does not make any difference. It is not a mere change of head of income but absence of income all together and capital gain has not arisen in the year at all. He therefore submitted that the order of CIT(A) upholding the disallowance does not call for any interference. 8. We have heard the parties and considered their rival submissions. In the present case we are concerned only with acquisition of shares on capital account and the taxability of dividend income which was chargeable under the head "income from other sources" before introduction of section 10(33) of the Act which excludes dividend income from the computation of total income of an assessee. Section 10(33) reads as under:- "10. In computing the total income of a previous year o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other sources". The Supreme Court further observed that "The plain natural construction of the language of section 57(iii) of the Income-tax Act, 1961, irresistibly leads to the conclusion that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction : it does not say that the expenditure shall be deductible only if any income is made or earned." What this decision says is that actual earning of dividend is not necessary to allow the expenditure and it would be sufficient to claim the deduction of interest paid on borrowings which have been used in acquiring the shares. The shares were acquired by the assessee in earlier year when dividend was taxable under the head "other sources" under section 56 and interest paid by the assessee has been claimed and allowed in earlier years as having been incurred for earning and making income from dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is is what is the import of the Supreme Court decision in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. It was held that the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee. It is held that the assessee may be entitled to capitalize the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under section 56. 13. We may refer to in this context the decisions referred to by the learned DR on this point dealing with the situations of deductibility of expenditure with respect to interest on borrowings under section 57(iii) of the Act. One is of Gujarat High Court in the case of Kalindi Investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income relatable to the transaction in question. The next question that would arise that in the light of the settled legal position : it is not necessary that any income must actually have been earned for the purpose of claiming deduction, do the facts of the case go to show that even that condition is applicable ? The Tribunal has found from the facts that the source of income (shares) has altogether disappeared. In relation to this finding Mr. Karia during the course of his submissions contended that the Tribunal had committed an error in recording this finding because what had happened was that the assessee company had converted from one form of investment to another form of investment when the shares of Telerad (P.) Ltd. were transferred to Ofisade (P.) Ltd. and it was stipulated as per the agreement that the consideration shall be received in instalments spread over a period of eight years. This contention requires to be stated to be rejected, because it is the consideration for transfer of shares which is payable in instalments and that too without interest. It is not as if non receipt of consideration is a form of investment by way of interest bearing deposit; if it was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interval was not more than a month, the shares were donated to a charitable trust known as K.J. Somaiya Trust. This was some time in April, 1967, although the exact date of donation is not on the record. Interest of Rs. 5,833 was paid by the assessee to the said Mr. K.J. Somaiya for the assessment year 1968-69 and the said payment is the basis of question No. 1 for the said assessment year. Similarly, for the next assessment year, that is 1969-70, the assessee paid interest of Rs. 35,000 also to the said Mr. K.J. Somaiya. All the three authorities below, namely, the ITO, the AAC as well as the Tribunal, have rejected the claim of the assessee for being allowed deduction of this interest. This was on the basis that the interest was not paid for acquiring any income earning asset but for acquiring an asset which was meant to be immediately donated to a charity. That the assessee had this intention can be gathered from the circumstances and particularly bearing in mind the very short time interval between the acquisition of the assets and its donation to the charitable trust. On reference the High Court upheld the order of disallowance by observing: "This is precisely the basis on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33). Section 14A was inserted to clarify this intention of the Legislature to set the existing controversy on this issue at rest. 17. In the present case, we find that the borrowed money has been utilized in purchase of shares held as investment. As the monies borrowed has been utilized in purchase of shares held as investment, the interest paid on so borrowed monies is allowable against the income from dividend on such shares irrespective of whether or not there is any yield of dividend on the shares purchased and held as investment. In other words, the interest incurred is relatable to earning of dividend on the shares purchased and held as investment. The dividend income is now exempted from tax by virtue of section 10(33) of the Act and, therefore, as a consequence thereof, the interest paid on borrowed capital utilized in purchase of shares held as investment, being the expenditure incurred in relation to dividend income not forming part of assessee's total income, cannot be allowed as a deduction. There is no chargeable income against which it can be allowed as a deduction. It cannot also be allowed against any other taxable income inasmuch as the interest so paid is not re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -O is a change of mode of tax paid by the shareholder on the dividend income. The amount paid to the shareholder by way of dividend is the full amount that is declared as dividend by the company in its general meeting and not the amount after deducting the tax payable by such company under section 115-O of the Act on the amount of dividend declared or distributed or paid to the shareholder. Before the insertion of section 115-O and section 10(33) of the Act, the full amount of dividend declared by the company was being paid to the shareholder but subject to deduction of tax at source. The dividend received by the shareholder was includible in the computation of total income and as such it was chargeable to tax before insertion of section 10(33) in the Act. But now the dividend received by the shareholder from a domestic company is not includible in the total income by virtue of newly inserted section 10(33) of the Act and as such it can be regarded as income not chargeable to tax. In both the situations, i.e. before and after the insertion of section 10(33) of the Act, the only difference lies in the fact that before insertion of section 10(33) in the Statute the dividend declared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidual shareholder is another and a separate tax payer, on whose behalf the company deducts a tax which it pays a dividend, but on whose behalf it is not paying the tax when it pays its own tax to the crown." This is the view upheld by the Supreme Court in the case of Purushottamdas Thakurdas v. CIT [1963] 48 ITR 206. It says that when a company pays tax, it does so in discharge of its own liability and not on behalf of, or as agent for, its shareholders. 21. The Indian Income-tax Act, 1922 however made a departure to general legal position and provided if a company pays a tax, proportionate amount was to be increased to dividend receipt for inclusion in total income of the shareholder and grossed up amount was to be deemed to the tax paid by the shareholder. This system is now given up in the. Income-tax Act, 1961 and the original position was restored, i.e., company is taxed on its total income and the shareholder's tax was deducted at source from the dividend so declared and given credit to the shareholder instead of allowing a credit of proportionate tax paid by the company treating the grossed up amount as deemed to have been paid by the assessee. 22. Recently a case came ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mumbai Bench. This decision on which assessee places heavy reliance discusses this issue as under: "17. We also do not find any substance in the contention of the department that dividend income earned by the assessee is fully exempt under the Income-tax Act, 1961. During the relevant assessment year, dividend income received by the shareholder and as referred in section 115-O was exempt under section 10(33) of the Income-tax Act, 1961. As per the provisions of section 115-O, a company declaring, distributing or paying any dividend is liable to deduct tax at certain rate on the amount of dividend declared, distributed or paid. As soon as a company declares dividend in favour of its shareholder, the dividend income, declared becomes income receivable by the shareholder. Thus, if tax is paid out of such dividend declared whether by shareholder directly or by the company in a indirect manner, it is the dividend income which has suffered tax. In fact dividend declared by the company is the income of the shareholder. Before the existing provisions of section 115-O, the dividend income was taxable in the hands of the shareholders. Now as per the provisions of section 115-O the tax is b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved from the balance sheet that there were various business transactions carried on by the assessee company during the financial year of the nature of selling its investments, utilization of the opening cash and bank balances, procuring unsecured loans during the financial year and utilization of the said funds for its business purposes. Thus, the assessee company had carried on the activities of all the ingredients of investment and finance company. Thus, the assessee company was not only having its objects in dealing with the investment snares but there were other circumstances as stated above which proved undoubtedly that the assessee company was an investment company. Therefore, the above Supreme Court decision have moreover supported the case of the assessee company that the company was actually dealing in the business of investment in shares. In the case of Challapalli Sugars Ltd. the Hon'ble Supreme Court laid down that if the interest paid on the amount borrowed for acquiring and installing machinery and plant for a period prior to commencement of production the same would actually form part of the actual cost of machinery and plant. In the present case as we have discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n investment and finance company and these activities of the company were systematic. Therefore the facts of the above case of the Madras High Court are not relevant to the facts of the present case. In the case of Brooke Bond and Co. Ltd., the Hon'ble Calcutta High Court held that the dividend earned by the assessee company from investments in shares of companies carrying on tea business would never be said to be part of its business income because investment in shares were not incidental to the assessee's business activities and they were not held as trading assets. But in the present case, the main business of the assessee was investment in shares. The assessee company carried on the activities in respect of all the ingredients of an investment and finance company. Therefore, the main business of the assessee was to deal in investments and hence, the dividend income earned by the assessee was income from the main business carried on during the relevant assessment year. The facts of the above said case are not relevant to the facts of the present case because in the above said case the assessee was earning the dividend income from its investment in shares, which was not the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Calcutta Tramways Co. Ltd. v. CWT [1972] 86 ITR 133, Kesoram Industries Cotton Mills Ltd. and Purushottamdas Thakurdas were also not considered by the Mumbai Bench in the case of Mafatlal Holdings Ltd. These principles laid down in the said decisions of Supreme Court, have not been brought to the notice of the Mumbai Bench. 26. Further the Bombay Bench had proceeded on the basis that the tax is paid by the company on such dividend but that is not exactly the issue to be looked into. What one has to see is whether the expenditure incurred by the assessee was in relation to income which does not form part of the total income. As aforesaid by virtue of section 10(33) the dividend does not form part of total income of shareholder. Thus, once the dividend income does not form part of assessee's total income, section 14A comes into play instantly and thereafter it would be besides the issue as to who paid the tax on the dividend declared. The Bombay case was also a case of trader and as is evident from para 18 of that order extracted above where different consideration may apply because of expenditure would not only be dividend but profit on dealing in shares. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the dividend income received by the shareholder is in fact does not form part of assessee's total income and exempt from tax by virtue of the provisions contained in section 10(33) of the Act and as such expenditure incurred in relation thereto cannot be allowed as deduction from other taxable income. 29. The second issue made out by the learned counsel is that when the shares were purchased and the assessee incurred liability to pay interest the dividend was forming part of assessee's total income chargeable to tax. It became non includible only w.e.f. assessment year 1998-99 and since the expenditure was incurred for earning taxable income at that time, it would not change its character by subsequent event. We do not find any force in this contention of the assessee as well, firstly, because the interest liability is recurring liability of the expenditure of revenue nature from year to year starting from the date of acquisition of shares onwards. See in this case the decision in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC). In the case of Tuticorin Alkali Chemicals Fertilizers Ltd., the Supreme Court held that in order to earn income out of the surplus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the introduction of provisions of section 14A which read as under: "The intention of inserting the new section retrospectively was to set the existing controversy on this issue at rest and not to unsettle the cases by raising the issue afresh. It is proposed to insert a proviso to section 14A so as to clarify that the Assessing Officer shall not reassess the case under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April 2001." 32. The Proviso thus clarifies that by applying the provisions of section 14A of the Act no re-assessment under section 147 of the Act or rectification under section 154 of the Act shall be made for any assessment year beginning on or before 1st day of April, 2001, in cases where the assessment has already been made meaning thereby not to unsettle the cases by raising the issue fresh by invoking section 147 or 154 of the Act. But for the Proviso so inserted, the provisions of newly inserted section 14A with retrospective effect from 1-4-1962 could have been applied to already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding the apportionment of the expenditure and allowing deduction of only that proportion of it which was referable to the taxable income, was unsustainable. This decision, in our opinion, would be of no help to the assessee after the introduction of section 14A of the Act. 36. Even otherwise there is no such situation in the present case. The assessee had made investment in shares out of the borrowed money not for carrying on any business. There is no question of any indivisibility of various sources of income by the assessee. The interest paid by the assessee on such borrowed capital which has been invested in shares, is to be allowed as a revenue expenditure under section 57 in view of the Supreme Court decision in the case of Rajendra Prasad Moody. There is no other source of income in so far as these borrowing and shares are concerned. The possibility of earning the income by way of capital gain on sale of shares in future may not be of any help to the assessee, in advancing the contention that it was of indivisible source of income and therefore the expenditure could be allowable while computing the capital gain on sale of said shares. The expenditure of interest on borro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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