TMI Blog2006 (1) TMI 183X X X X Extracts X X X X X X X X Extracts X X X X ..... used in Financial Statements (filed by the assessee) had defined a liability as the financial obligation of an enterprise other than owners' funds . Therefore, on this ground also, the decision of the CIT(A) requires to be upheld. We do so and dismiss the ground. Exempted dividend income u/s 14A - Sec. 14A does not seek to touch upon the above controversy at all. In fact, it cannot, because the controversy has been settled in favour of the Revenue both judicially as well as statutorily as noted above. Now, s. 14A, as explained by the Memorandum Explaining the Provisions of the Finance Bill, 2001, which we have already quoted above, seeks to nullify the effect of certain judgments in which it has been held that in the case of an indivisible business, no part of the expenditure incurred by the assessee can be disallowed as relating to the exempted income. There is no dispute that the entire dividend, which is exempt u/s 10(33) was received from M/s Eicher Motors Ltd. by a single dividend warrant and no effort or expenses were necessary or were incurred to earn such income. There is also no material brought before us to show that the assessee's contention that no part of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97-98 shows that it has followed the earlier order of the Tribunal in the assessee's own case for the asst. yrs. 1993-94 and 1994-95. The issue is thus squarely covered by the orders of the Tribunal in the assessee's own case for the asst. yrs. 1993-94, 1994-95 and 1997-98. Respectfully following the same, we decide the issue in favour of the assessee for the year under appeal. We may add that the facts relating to the ground are the same for the year under appeal also. The first ground is accordingly dismissed. 3. The second ground is that the CIT(A) erred, in allowing deduction of Rs. 1,35,417 under s. 35AB of the IT Act. A perusal of the assessment order does not throw any light on this issue. However, the assessee raised the ground before the CIT(A) to the effect that the AO has grossly erred in not allowing the deduction. Apparently, the claim was made in the computation of the income or in the course of the assessment proceedings. Be that as it may, the fact remains that the claim was not allowed in the assessment. On appeal, the CIT(A) noted that the assessee incurred expenses of Rs. 8,12,510 towards the cost of Mofa drawings in the previous year relevant to the asst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that at any rate the provision cannot be considered as provision for unascertained liabilities so that it can be added back to the book profit. Reliance was placed on the order of the Delhi Bench of the Tribunal in the case of Modi Rubber Ltd. in ITA No. 3270/Del/1992 and the order in the case of Steel Authority of India Ltd. vs. Asstt. CIT (2001) 70 TTJ (Del)(TM) 849 : (2001) 76 ITD 69 (Del)(TM). Reliance was also placed on the judgment of the Bombay High Court in CIT vs. Echjay Forgings (P) Ltd. (2001) 166 CTR (Bom) 100 : (2001) 251 ITR 15 (Bom). The CIT(A) referred to Part III of Sch. VI to the Companies Act which contains the definition of the terms provision . reserves and liabilities . He noted that in terms of the definition contained in para 7(1) and (2) of Part III of Sch. VI, the provision for doubtful debts made in respect of specific debts was in the nature of a provision for ascertained liabilities and was not in the nature of reserve. Accordingly. he upheld the assessee's contention and directed the AO to reduce the book profit by the amount of Rs. 2,21,32,285. 6. The Revenue is in appeal. We have considered the rival contentions. So far as the computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the company may not be realised. Explanation (c) refers to amount set aside to provisions made for meeting liabilities . By making the provision for bad and doubtful debts, the assessee is not guarding against any liability which it may be called upon to pay. For instance, a provision made for gratuity payable to the employees may properly be called a provision made for meeting a liability. But, when a provision is made to guard against the possible non-recovery of amounts due to the assessee, it cannot be described as provision made for meeting a liability. The Institute of Chartered Accountants of India (ICAI), in its guidance note on Terms used in Financial Statements (filed by the assessee) had defined a liability as the financial obligation of an enterprise other than owners' funds . Therefore, on this ground also, the decision of the CIT(A) requires to be upheld. We do so and dismiss the ground. 8. We now take up the third ground which is that the CIT(A) erred in deleting the addition of Rs. 5 lakhs made towards earning of exempted dividend income under s. 14A, ignoring the fact that certain expenses must have been incurred by the assessee in earning the dividend income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t day of April, 2001. The section was introduced by the Finance Act, 2001 with retrospective effect from1st April, 1962. The Memorandum Explaining the Provisions of the Finance Bill, 2001 [(2001) 166 CTR (St) 145 : (2001) 248 ITR (St) 162] explains the purpose behind the introduction of the section as under: No deduction for expenditure incurred in respect of exempt income against taxable income. 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 payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t look at s. 10(2) and deduct all the allowances permissible to him. In allowing a deduction which is permissible the question arises: Do we look behind the expenditure and see whether it has the quality of directly or indirectly producing taxable income? The answer must be in the negative for two reasons: First, Parliament has not directed us to undertake this enquiry. There are no words in s. 10(2) to that effect. On the other hand, indications are to the contrary. In S. 10(2)(xv), what Parliament requires to be ascertained is whether the expenditure has been laid out or expended wholly and exclusively for the purpose of the business. The legislature stops short at directing that it be ascertained what was the purpose of the expenditure. If the answer is that it is for the purpose of the business, Parliament is not concerned to find out whether the expenditure has produced or will produce taxable income. Secondly, the reason may well be that Parliament assumes that most types of expenditure which are laid out wholly and exclusively for the purpose of business would directly or indirectly produce taxable income, and it is not worth the administrative effort involved to go further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... divisible business. Sec. 10(2) says that profits under s. 10(1) in respect of a business should be computed after deducting the allowances mentioned therein. One of the allowances allowed is that mentioned in s. 10(2)(xv) which says that any expenditure laid out or expended wholly and exclusively for the purpose of such business shall be deducted as an allowance. The mandate of s. 10(2)(xv) is plain and unambiguous. Undoubtedly, the allowance claimed in this case was laid out or expended for the purpose of the business carried on by the assessee. The fact that the income arising from a part of that business is not exigible to tax under the Act is not a relevant circumstance. For the foregoing reasons, we agree with the view taken by the High Court. While holding as above, the Supreme Court followed its earlier judgment in the case of CIT vs. Indian Bank Ltd. 13. Recently, the Supreme Court had occasion to examine the matter over again in Rajasthan State Warehousing Corporation vs. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC). In this case, the warehousing corporation derived income from interest, letting out of warehouses and administrative charges for procuring of foodgra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The precise question that arises for consideration is whether it is necessary for the AO to show on the basis of the material on record that the assessee in fact incurred expenditure to produce non-taxable income which he may disallow or whether he can estimate a part of the expenditure incurred by the assessee as expenditure incurred to produce non-taxable income on the assumption that a part of the expenditure must have necessarily been incurred to produce non-taxable income. A look at the language of the section shows that the AO can disallow only expenditure incurred by the assessee in relation to the exempt income. The word incurred clearly implies that it must be shown as a fact that some expenditure was in fact incurred by the assessee to produce exempted income. It was open to the legislature to confer power upon the AO to assume that a part of the expenditure must have necessarily been incurred to produce exempted income which the AO can estimate and disallow and accordingly, use suitable expressions in the section conferring such power upon the AO. One s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. United General Trust Ltd. (1979) 119 ITR 664 (Bom), from which an appeal was taken to the Supreme Court. The judgment of the Bombay High Court is reported as Appendix to another judgment of the same High Court in CIT vs. Advance Insurance Co. Ltd. 1978 CTR (Bom) 538 : (1979) 119 ITR 660 (Bom). In this case, question No.4 was to the effect whether the assessee-company was entitled to the rebates under ss. 85 and 101(2) of the IT Act on gross dividends or on net dividends after the deduction of the costs relating thereto. While deciding this question, the Bombay High Court referred to its earlier judgment rendered on 30th Nov., 1976 in the case of CIT vs. United General Trust (P) Ltd.. which was unreported at that time, but later on reported as Appendix to the judgment in the case of Advance Insurance Co. Ltd. In the case of Advance Insurance Co. Ltd. the question referred to above was answered in favour of the assessee. When we turn to the judgment of the Bombay High Court in the case of CIT vs. United General Trust, we find that the question sought to be referred was whether the Tribunal was justified in applying the decision of the Bombay High Court in the case of CIT vs. New ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the same result would follow from s. 80AA, introduced by the Finance (No.2) Act, 1980 with retrospective effect from 1st April, 1968. For these reasons, the appeals filed by the Department were allowed and the application made by the CIT under s. 256(2) was deemed to have been allowed, a reference made and answered in the manner indicated above. 18. It seems clear to us from the above discussion that the controversy in the case of CIT vs. United General Trust, was (a) whether a question of law arose out of the order of the Tribunal as claimed by the Department; and (b) whether the question was covered in favour of the Revenue on merits? No doubt, the question framed contained a reference to proportionate management expenses , but the focus of the controversy was whether the assessee was entitled to the deduction under s. 80M on the gross amount of dividend or the net amount of dividend. While the Bombay High Court felt, at the time when its decision was rendered, that no question arose out of the order of the Tribunal in view of an earlier judgment of the Supreme Court as well as two judgments of the Bombay High Court itself which had decided the question of law, and on that g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en omitted and an amendment was made to s. 80AB to make it applicable to all deductions, claimed in respect of certain incomes. The thrust of both the sections is that where an assessee claimed deduction in respect of certain income which is included in the gross total income, then for the purpose of computing the deduction under the relevant section, the AO will have the power to compute the income in accordance with the relevant provisions of the IT Act. This in turn meant that the AO had the power to reduce the income in respect of which deduction is claimed by the amount of expenditure which was authorised by the Act to be deducted from the income. To give an example, if an assessee claimed deduction in respect of dividend under s. 80M, the dividends being taxable under the head Income from other sources , the AO had the authority to compute the dividend income by reducing the same by the deductions specified in s. 57(i), such as any reasonable sum paid by way of commission or remuneration to a banker or any other persons for the purpose of realizing such dividend on behalf of the assessee. The deduction is allowed to the assessee only on the net income as computed under the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s related to the exempted income. It, therefore, appears to us clear that the section only removes the disability on the part of the AO to disallow such expenditure, a disability to which he was subjected by the three judgments of the Supreme Court cited supra. The mere removal of the disability statutorily, however, does not ipso facto authorize him to assume that a part of the expenditure has been incurred by the assessee in relation to the exempted income and to proceed to disallow the same on estimate. The section does not, in our opinion, relieve the AO of the burden of proving, on the basis of evidence or material on record that the assessee has in fact incurred expenditure which has relation to the exempted income. Even in regard to s. 80M, the Calcutta and Madhya Pradesh High Courts have held that the AO cannot estimate and disallow any notional or ad hoc expenditure to reduce the dividend income. The Calcutta view is embodied in the following judgments: (a) CIT vs. National Grindlays Bank Ltd. (1993) 109 CTR ((Cal) 264 : (1993) 202 ITR 559 (Cal); (b) CIT vs. United Collieries Ltd. (1993) 203 ITR 857 (Cal); (c) CIT vs. Enemour Investments Ltd. (1994) 72 Taxman 370 (Cal). In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was further observed that since in the case before the High Court the taxing authorities have not taken into consideration the actual expenditure incurred by an assessee while earning the dividend but has only proceeded to take notional expenditure, the same cannot be held to be sustainable in law and that it is not in accordance with the view even taken by Supreme Court in the case of Distributors (Baroda) (P) Ltd. Two aspects stand out, on a perusal of the above judgments. First, that the High Courts have not authorised the disallowance of any notional expenditure (as against actual expenditure) to reduce the income in respect of which deduction is claimed and second, that in the cases before the Calcutta High Court in En em our Investments Ltd. and the Madhya Pradesh High Court in State Bank of Indore even the Revenue has not relied on the judgment of the Supreme Court in CIT vs. United General Trust Ltd. thereby suggesting that in its understanding also that judgment cannot be understood as authority for permitting an estimated or notional expenditure to be disallowed in order to reduce the income eligible for the deduction. 21. Having held as above, we now proceed to exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y with the utilisation of the funds for earning tax-free income. The question whether it was the duty of the AO to prove on the basis of material on record that the assessee actually incurred expenditure in relation to the exempted income did not precisely arise before the Tribunal nor has it been decided specifically. However, it seems to us that the decision could be construed as holding, albeit impliedly, that only actual expenditure incurred in relation to exempted income can be disallowed, because the Tribunal in terms held that the onus is on the Revenue to prove that interest paid by the assessee on borrowed funds related to acquisition of shares yielding tax-free income. Obviously, the Revenue would be in a position to discharge the burden only on the basis of material on record to show that interest (or any other expenditure) was paid by the assessee on funds borrowed for acquiring the shares. It seems to us with respect, that it is possible to understand the order of the Tribunal in Maruti Udyog Ltd. as also laying down that only actual expenditure incurred by the assessee to earn exempted income can be disallowed by the AO under s. 14A. 23. In the result, the appeal is d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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