TMI Blog2009 (8) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6/Kol/2003, on proportionate basis i.e., interest paid on borrowed funds invested in the form of long term investment other than the trading investment calculated as under: Unsecured Loans Rs. 8,51,65,000 Less: Loans and advance given Rs. 1,62,95,000 Less: Investment in unquoted shares (trade) Rs. 4,61,155 Rs. 1,67,56,155 --------------- --------------- Unsecured loans invested in shares (other than trade) long-term. Interest paid attributable in relation to long-term investment (other than trade) i.e., to earn exempted income Rs. 6,88,70,000 1,21,03,367 x 6,88,70,000 = ------------------------- = Rs. 97,87,570 8,51,65,000 3. The CIT(A) held that the AO was justified in disallowing the proportionate interest pertaining to investment for earning of dividend, though exempt income was not earned during the year. He however, agreed with the alternative submission of the assessee that the net interest amount debited to the P L a/c was required to be apportioned and not the gross interest expenditure. The AO was accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved was Rs. 1.01 crore as against interest payment of Rs. 1.21 crore. In the year under consideration the assessee had not received any dividend on the shares in which it traded (and held as investment) and, therefore, it is claimed that the question of disallowing any interest would not arise by application of s. 14A of the Act. He further submitted that interest is allowable under s. 36(l)(iii) of the Act and, therefore, the disallowance under s. 14A is not justified. 5. Pointing out the provisions of s. 14A, the learned counsel for the assessee submitted that what is to be disallowed is the expenses in relation to income which does not form part of the total income under this Act. Therefore, there must be an income received or receivable and that does not form part of the total income. The word "does not" is a present tense and he referred to the dictionary meaning in this regard. Collins Cobuild Student Dictionary "'does' is the third person singular of the present tense of do." "'Doesn't' is the usual spoken form of 'does not'." OxfordDictionary "'do': Verb (does past did, past part done) 1. perform or carry out (an action). 2. achieve or complete (a specified target ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure to earn income. On the contrary, it held that if there were income, expenditure is to be disallowed. It was asserted that what is relevant to consider is the object of incurring the expenditure. If such object were for earning exempt income, then the disallowance is rightly called for under s. 14A. If, however, it were for earning taxable income then no disallowance can be made, even if the assessee had incidentally earned some income which is exempt from tax. It further held that what is relevant is to work out the expenditure in relation to the exempt income and not to examine whether the expenditure incurred by the assessee has resulted into exempt income or taxable income. Sub-s. (1) of s. 14A, clearly points out that the exercise of making disallowance starts with working out the expenditure incurred in relation to such exempt income. Learned counsel of the assessee further referred to the decision in the case of CIT vs. Maharashtra Sugar Mills Ltd. 1973 CTR (SC) 489 : (1971) 82 ITR 452 (SC) wherein it is held that in allowing the expenditure, "the fact that the income is exempt is not a relevant circumstance". He also referred to the decision of Supreme Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany on borrowed funds amounting to Rs. 241.10 lakhs overlooking the fact that he borrowed funds which were used by the assessee company to invest in the capital or another partnership firm and since profits derived by the assessee company from a partnership firm were exempt from tax under s. 10(2A) of the IT Act the interest expense related to such tax free profits is to be disallowed under s. 14A of the IT Act?" 10. He then posed a question that if a person advances interest-free loan for the purpose of business, the expenditure would still be allowable though there was no income. Similarly, the interest paid on a redeemable debenture to be converted into shares in the 5th year was to be allowed and it could not be said that in the 5th year the expenditures was for share capital. Learned counsel for the assessee also relied upon the decision of Asstt. CIT vs. Lafarge India Holding (P) Ltd. (2008) 19 SOT 121 (Mumbai) in this regard. He also referred to the decision in the case of World Network Services (P) Ltd. vs. Dy. CIT in ITA No. 1833/Mum/2003 for asst. yr. 1999-2000 in which a case under s. 10B has been examined and the expenditure was held to be capital by AO but was disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icking a line from here and there. He submitted that s. 14A would apply to an exempt income whether received/earned or not received or not earned. He referred to the Memorandum Explaining the Provisions reported in (2001) 166 CTR (St) 145 : (2001) 248 ITR (St) 162 and (2002) 172 CTR (St) 13 : (2001) 252 ITR (St) 65 stating that expenditure is to be allowed only to the extent relating to the earning of income and the fact that the provisions of s. 14A are introduced with retrospective effect from 1st April, 1962 i.e. right from the inception of the Act is indicative of that. He further submitted that s. 14A cannot be read de hors with s. 14A(2) and 14A(3) of the Act. 14. He submitted that to overrule the decision in CIT vs. Maharashtra Sugar Mills Ltd. and Rajasthan State Warehousing Corporation vs. CIT and in order to disallow part of expenditure incurred by the assessee relatable to exempt income, even in a case where the assessee carries on indivisible business (and part of the income received is claimed as exempt), the provisions of s. 14A have been brought on the statute. It is submitted that expenditure incurred in relation to exempt income were not allowable as deduction ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r this Act and, therefore, the receipt of income in a particular year is not material for disallowing the expenditure. He further referred to the decision of the Special Bench in the case of Aquarius Travels (P) Ltd. vs. ITO and submitted that the matter stands resolved by this decision against the assessee. He also referred to the decision of Special Bench in the case of Daga Capital Management (P) Ltd. wherein the assessee was an intervener. 16. Learned counsel for the assessee in reply submitted that the assessee's case in above case of Daga Capital Management (P) Ltd. related to asst. yr. 2002-03 and not asst. yr. 2003-04 where there was no income in that year under consideration and also the dividend was taxable in that year. He also submitted that the case of Daga Capital Management (P) Ltd. was that if there were no income there is no disallowance. The reasoning of Daga Capital Management (P) Ltd.'s case should be followed and if there is no income, the question of finding out the expenditure does not arise. He referred to the provisions of s. 2(45) and s. 5 wherein the total income is stated to be of the year and, therefore, the case made out by the learned Departmental R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5)........" 20. As the dividend income does not form part of total income under the Act the provisions of s. 14A would come into play. This section reads as under: "14A. Expenditure incurred in relation to income not includible in total income.-(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The AO shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-s. (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment is not allowable whether or not there is any yield of dividend. It is so held by applying the decision of the Supreme Court in Rajendra Prasad Moody in the reverse case wherein it is that irrespective of dividend receipt, expenditure has to be allowed. Now since dividend is exempt, as a consequence thereof expenditure has to be disallowed. 23. The contention of Shri Vohra that the decision of the Supreme Court in the case of Rajendra Prasad Moody, dealt with issue of admissibility of deduction in s. 57(iii) and the language of the said section is materially different from the language of s. 14A of the Act and secondly, that the aforesaid decision was rendered in the context of purchase of shares held as 'investment', in which case deduction of expenses is claimed under s. 57(iii), whereas in the present case the assessee is undisputedly entitled to deduction of expenses under s. 36(1)(iii) of the Act and therefore s. 14A cannot be applied in [he case of a person engaged in the business of dealing in shares claiming deduction under s. 36(1)(iii) of the Act, has no force. Though it is true that language of s. 57 for allowance of expenditure and the language of s. 14A for dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the expenditure was a profitable one or that in fact any profit was earned.' It is indeed difficult to see how, after this observation of the Court, there can be any scope for controversy in regard to the interpretation of s. 57 (iii)." 26. It is true that the Court, while considering the expression 'for the purpose of making or earning such income', held that in order to claim deduction under the aforesaid s. 57(iii) of the Act, it is not necessary that income should have actually been earned or made. The actual earning or receipt of income on parity of reasoning would also not be a condition for disallowance of such interest under the provisions of s. 14A of the Act which employs the expression 'in relation to income which does not form part of the total income'. The ratio of the decision can be used in the converse situation also to hold that even if no income were received, expenditure incurred can be disallowed under s. 14A of the Act. The expenditure incurred by way of interest on acquisition of shares is, in the case of the assessee, is allowable deduction in terms of s. 36(1)(iii)/37(1) of the Act as the expenditure by way of interest incurred 'for purposes of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation it cannot be said that no disallowance is to be made or that the disallowance is resorted to by the Revenue in relation to future income. It is for the present current years' total income which does not include the income from dividend as specie because of its absence. A thing which is absent cannot exist in and consequently does not form part of anything. 29. We may refer to the object of introducing the provision of this inserted s. 14A by the Finance Act, 2001, with retrospective effect from 1st April, 1962 as clarified in the provisions as well as in the Memorandum Explaining the Provisions, Notes on Clauses relating to the Finance Bill, 2001 and in the Board's Circular No. 14 of 2001, dt.22nd Nov., 2001[(2002) 172 CTR (St) 13] and Circular No. 8 of 2002, dt.27th Aug., 2002[(2002) 178 CTR (St) 9] in the following way: "Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome, 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 of the Act with retrospective effect from1st April, 1962. 32. It is true that the Supreme Court held in Maharashtra Sugar Mills Ltd. that the fact that the income is exempt is not a relevant circumstance and in the case of Rajasthan State Warehousing Corporation that if there is one indivisible business, the entire expenditure is allowable under s. 36(1)(iii) of the Act but these decisions were rendered prior to the introduction of s. 14A by the Finance Act, 2001, with retrospective effect and, therefore, they would have no application after introduction of s. 14A where the expenditure is not to be allowed if it related to income not included in the total income of the assessee. Similarly, the decisions in the cases of Malayalam Plantations Ltd., Birla Cotton Spg. Wvg. Mills Ltd., Madhav Prasad Jatia and S.A. Builde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the earning of the income was to be disallowed in terms thereof. The appeal preferred by the assessee against the assessment orders was allowed by the CIT(A). In second appeal the Tribunal, after noting the facts that in one year no interest was received from the partnership firms, while in the second year, the interest income was offered for tax, held that since in both the years the assessee had not claimed any exemption under s. 10(2A), there was no question of application of provisions of s. 14A of the Act. The observations of the Tribunal read as under: "For the asst. yr. 2001-02 the assessee had in fact earned interest of Rs. 99,01,000 and the AO has brought it to tax. The first appellate authority has rightly held that this receipt is taxable under the head 'Profits and gains of business or profession' under s. 28(iv) of the Act. There is no exemption claimed under s. 10(2A) of the Act by the assessee. Sec. 10(14) (sic-s. 14A) clearly states that expenditure incurred by the assessee in relation to income which does not form part of total income under the Act will not be allowed. In this case, for both the assessment years, there is no income earned by the assessee wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (2005) 95 TTJ (Hyd) 687 : (2005) 94 ITD 309 (Hyd). These are the cases before rendering of Special Bench decision in the Daga Capital Management (P) Ltd.'s case and the expenditure was held to be allowable under s. 36(1)(iii) and not because of absence of exempt income. In any case that view is not in consonance with the clear language of s. 14A as discussed above. 36. Delhi Bench of the Tribunal in the case of Insaallah Investments Ltd. vs. ITO 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. 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. 37. We are conscious of the decision of Sun Engineering Works (P) Ltd., for the proposition that it is not permissible to pick a word or a sentence in a decision totally out of its context and the Supreme Court in the case of Padmasundara Rao (Decd.) Ors. vs. State ofTamilNadu Ors. (2002) 176 CTR (SC) 104 : (2002) 255 ITR 147 (SC) at 153 observing that the Courts should no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is contending in this case though in different phraseology that there must be exempted income earned to disallow the expenditure. It was rightly rejected, by stating: "We are not convinced with the view point of the learned Authorised Representative that s. 14A speaks about making disallowance of expenditure which has resulted into exempt income. The language of sub-s. (1) of s. 14A clearly provides that no deduction shall be allowed 'in respect of expenditure incurred by the assessee in relation to income which does not from part of the total income under this Act'. On going through the simple and plain language, it is abundantly clear that the relation has to be seen between the exempt income and the expenditure incurred in relation to it and not vice versa. What is relevant is to work out the expenditure in relation to the exempt income and not to examine whether the expenditure incurred by the assessee has resulted into exempt income or taxable income. If the view point of the learned Authorised Representative is accepted then it would mean putting the cart in front of the horse and redrafting sub-s. (1) of s. 14A. On going through sub-s. (1), it can be clearly noticed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way there would be no confusion in understanding the order of the Special Bench. 43. What one has to see is whether any expenditure were incurred by an assessee in relation to an income that does not form part of total income of the assessee under this Act, and 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. 44. An attempt was made by the assessee to show the overreaching effect of r. 8D and wanted to raise an additional ground but we did not allow him to address on these issues because of the limited scope of reference to this Special ..... X X X X Extracts X X X X X X X X Extracts X X X X
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