TMI Blog2007 (2) TMI 362X X X X Extracts X X X X X X X X Extracts X X X X ..... y the like amount. 2. The ld. CIT(A) ought to have held that the funds at interest have been borrowed by your petitioner for the purpose of business of development and construction of residential project on land (Kandivli Project) and hence, the interest expenditure of Rs. 5,04,56,580 (being part of the interest expenditure for the year) and allocated in the accounts to the cost of development and construction of Kandivli Project on land, and hence, disallowance of the said interest and consequential reduction made in the value of the project work-in-progress of Kandivli Project, by the Assessing Officer is required to be deleted." 2. At the time of hearing, the ld. counsel for the assessee invited our attention to the order dated 26-9-2006 passed by this Tribunal in assessee s appeal for the assessment years 1994-95 and 1996-97 and submitted that similar issue as in the appeal before us was also involved in the aforesaid two appeals which have since been considered by this Tribunal and the matter restored to the file of the Assessing Officer for a fresh decision with the following observations : "2. In both years, the only issue involved is regarding allowability of intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsistent increase in the borrowings. His observations are available in para 5.4 of the assessment order. For the reasons given in paragraph 5.4 of the assessment order, the Assessing Officer allocated interest of Rs. 5,04,56,580 to the investments made by the assessee-company in shares and consequently excluded the same from work-in-progress in respect of construction projects. In para 5.4 of the assessment order, the Assessing Officer states : "Thus it is evident that while investment has increased, the interest bearing funds have also increased or fresh loans were required to be taken. It in itself shows that the interest-free advances available to the assessee were not adequate to make fresh investment in shares or to undertake the activities of the assessee. When the funds have got intermingled, it cannot be said with certainty that only the interest-free funds were invested in shares. Assessee, cannot be allowed to burden the business of construction activity with interest bearing funds alone and to pass on the entire interest cost to the projects at hand. In any case, the aspect of utilization of interest-free advances available to the assessee for interest-free loans given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd income, which was exempt from tax. Provisions of section 14A are squarely involved in the case before us whereas these provisions did not come up for consideration in the case of the assessee for earlier years namely 1994-95 and 1996-97 before this Tribunal. 6. It may be relevant to mention here that the CIT(A) has followed his own order for assessment year 1999-2000 for confirming the order of the Assessing Officer and not the order of his predecessor for assessment years 1994-95 and 1996-97. The reasoning given by the learned CIT(A) in his order for the assessment year under appeal therefore needs appreciation. Besides, sub-sections (2) and (3) have been inserted in section 14A by the Finance Act, 2006. Hence the effect of those provisions insofar as they apply to the pending matters has also to be considered. 7. Deductions otherwise admissible under section 36(1)( iii ) and section 57( iii ) are now subject to the provisions of section 14A. Therefore, the applicability of the provisions of section 14A has to be examined first. If the expenses are not hit by section 14A(1), their deductibility has then to be considered under section 36(1)( iii ) or 57( iii ). 8. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he word "relate" under the head "Law" at page 2534 in " The New Shorter Oxford English Dictionary " (1993 Edition) is "Have some connection with, be connected to". The phraseology used in section 14A prohibiting the deduction in respect of expenditure incurred by the assessee in relation to exempt income is thus wide enough to cover all forms of expenses provided they have some connection with the exempt income. This is based on the principle that expenses must be allocated to that income to which they are connected to avoid distortions in the computation of both taxable as well as exempt income. This is also achieved by the matching principle of accountancy. In Taparia Tools Ltd. v. Jt. CIT [2003] 260 ITR 102 (Bom.), the Hon ble jurisdictional High Court has explained the matching principle as under : "The mercantile system of accounting is based on accrual. Basically, it is a double entry system of accounting. Under the mercantile system of accounting, profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Under the mercantile system of accounting, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. In Harish Krishnakant Bhatt v. ITO [2004] 91 ITD 311 (Ahd.), the Ahmedabad Bench of this Tribunal has held that, the dividend income being exempt under section 10(33), the interest on capital borrowed for acquisition of relevant shares yielding such dividend cannot be allowed deduction by operation of section 14A. In Dy. CIT v. S.G. Investments Industries Ltd. [2004] 89 ITD 44 (Cal.), the Calcutta Bench of this Tribunal has laid down two propositions: one, in view of section 14A inserted in the Income-tax Act with retrospective effect from 1-4-1962, pro rata expenses on account of interest relatable to investment in shares for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses; and two, the expression "expenditure incurred by the assessee in relation to income which does not form part of the total income" in section 14A has to be given a wider meaning and would include both direct an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed deduction. It is fairly well-settled by a catena of decisions that procedural provisions apply to all pending matters and that the rule against retrospectivity does not hit them. 12. In W.H. Cockerline Co. v. IRC [1930] 16 TC 1 (CA) at 19, Lord Hanworth quoted with approval the following passage from the judgment of Sargant L. J. : "The liability is imposed by the charging section, namely, section 38, the words of which are clear. The subsequent provisions as to assessment and so on are machinery only. They enable the liability to be quantified, and when quantified to be enforced against the subject, but the liability is definitely and finally created by the charging section and all the materials for ascertaining it are available immediately." In Halsbury s Law of England (Fourth edition, Vol. 23, paragraph 29), referring to the machinery provisions, it is stated : "It is important to distinguish between charging provisions, which impose the charge to tax, and machinery provisions, which provide the machinery for the quantification of the charge and the levying and collection of the tax in respect of the charge so imposed. Machinery provisions do not impose a charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to them, provisions which touch a right in existence at the passing of the statute are not to be applied retrospectively in the absence of express enactment or necessary intendement ( See Delhi Cloth and General Mills Co. Ltd. v. ITC AIR 1927 PC 242). The second is that a right of appeal being a substantive right the institution of a suit carries with it the implication that all successive appeals available under the law then in force would be preserved to the parties to the suit throughout the rest of the career of the suit. There are two exceptions to the application of this rule, viz., ( i ) when by competent enactment such right of appeal is taken away expressly or impliedly with retrospective effect; and ( ii ) when the court to which appeal lay at the commencement of the suit stands abolished [ See Garikapatti Veeraya v. N. Subbiah Choudhary [1957] SCR 488, AIR 1957 SC 540 and Colonial Sugar Refining Co. Ltd. v. Irving [1905] AC 369 (PC)]." (p. 1849) Halsbury s Laws of England (Fourth edition, Vol. 44, paragraph 925) states: "The presumption against retrospection does not apply to legislation concerned merely with matters of procedure or of evidence; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lights the need for taking a reason- able approach in the matter of allocation of expenses relating to exempt income. We hope that all these aspects will be kept in view while deciding the matters afresh. 15. At this stage, we may also mention that the deduction under section 36(1)( iii ) can be allowed only when the assessee establishes that the money borrowed was utilized for the purpose of its own business, i.e., construction business not only in the initial year of borrowing but also continued to be utilized in the succeeding years in which deduction is claimed. In K. Somasundaram Bros. v. CIT [1999] 238 ITR 939 (Mad.), it has been held that it is not the object to section 36(1)( iii ) to enable an assessee to make a large borrowing and create a liability for payment of interest thereon not only in the year in which the borrowing is made, but in the subsequent years as well, keep the loan outstanding and thereafter divert the amount initially borrowed by taking it out of the business by giving it interest-free to the relatives of partners and thereby continue to pay interest out of the income of the business and claim the amount of interest paid as a business expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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