2009 (8) TMI 126 - AT - Income Tax

Business Expenditure - Whether disallowance u/s. 14A can be made in a year in which no exempt income has been earned or received by the assessee - HELD THAT:- In the present case, we find that the borrowed money has been utilized in purchase of shares held both as investment as well as stock-in-trade. As the monies borrowed have been utilized in purchase of shares held, the interest paid on so borrowed monies is allowable against the income from dividend income either as incurred for making or earning dividend income on such shares or as incurred wholly and exclusively for the purposes of business carried on by the assessee, if he deals in such shares. It is in both the situations, irrespective of whether or not there is any yield of dividend on the shares purchased. In other words, the interest incurred is to be relatable to earning of dividend on the shares purchased.

The dividend income is now exempted from tax by virtue of s. 10(34), and, therefore, as a consequence thereof the interest paid on borrowed capital utilized in purchase of shares, 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 relatable to the earning of taxable income. This is what is provided by the legislature in the scheme of the IT Act even without the existence of s. 14A with retrospective effect from1st April, 1962.

If the answer is in affirmative then that expenditure cannot be allowed irrespective of the fact that it was allowable under different provisions of the Act where a different phraseology is used in allowing that expenditure as the focus has to be on disallowance within parameters of s. 14A, an overriding provision over allowance provisions. It would result in disallowance even if no income has resulted or made or earned by the assessee in the year under consideration. We also make it clear that the disallowance has to be of the entire amount of the expenditure so related and, as claimed in Revenue's appeal, cannot be reduced by the receipt of interest which has no relation to such expenditure.

Delhi Bench of the Tribunal in the case of Insaallah Investments Ltd. vs. ITO [2008 (2) TMI 652 - ITAT DELHI] held that the receipt Of dividend in the relevant year is irrelevant which is by following the decision of the Special Bench of the Tribunal in the case of Aquarius Travels (P) Ltd [2008 (2) TMI 455 - ITAT DELHI-D]. In this case of, Aquarius Travels (P) Ltd. the issue whether the provisions of s. 14A can be invoked in the appellate proceedings for the first time or not was held in affirmative.

The intervener has exempted income and therefore would not fall within the scope of the issue for which (the Special Bench) is constituted to dispose of the case of disallowance in cases where no exempted income is earned or received. We are therefore excluding this case from our consideration.

Therefore, answered affirmatively against the assessee and in favour of the Revenue.