TMI Blog2004 (8) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... eld 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 relatable to the earning of taxable income. This is what is provided by the Legislature in the scheme of the Income-tax Act even without the existence of section 14A of the Act with retrospective effect from 1-4-1962. We agree with the submission of the assessee that generally the decision of a co-ordinate Bench should be followed. But that is not the universal rule and it is subject to certain exceptions. With regard to the circumstances and the situation under which a co-ordinate Bench may come to a different conclusion than that of another Bench, we may refer to a decision of ITAT Ahmedabad Bench A in the case of Mira Industries v. Dy. CIT [ 2003 (4) TMI 220 - ITAT AHMEDABAD-A] . Thus, we are of the considered view that the tax payable by the company u/s 115-O on the amount of dividend declared, distributed or paid is not the tax paid for and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res were acquired by the assessee as an investor. These were acquired at the time when the dividend income was chargeable to tax. Dividend income not includible in taxable income, by virtue of insertion of sub-section (33) to section 10 of the Finance Act, 1997 w.e.f. 1-6-1997 and the tax is levied on distribution event directly on the company by virtue of another inserted section 115-O of the same Act. 2. The Assessing Officer formed an opinion that in view of the provisions of section 14-A r.w.s. 10(33) 115-O (w.e.f. 1-6-1997) the deduction could not be allowed in respect of expenditure incurred in relation to income, which did not form 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 fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as no income by way of sale of shares have been shown in the return of income. 4. The assessee has also sought to contend that investment in shares is co-linked with the earning of remuneration, which is offered for taxation. In this regard it is contended that the company law does not provide any such co-linking of remuneration with the amount of share holding. There is no such provision in the company law that only those employee would get remuneration who have substantial share holding in the company. The company and its employees are both separate entities in the eyes of company law as well as IT Act. 5. Thus in view 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 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the law as existed during the relevant assessment year when the dividend income was non taxable and hence the interest was to be disallowed. As regards the argument that the dividend is still taxable and only the procedure for collection of taxes has been shifted from the shareholders to the company, he held, that because in the hands of the shareholder the dividend income has become non taxable and hence the disallowance of interest was quiet justified. The plea that the capital gain is still taxable on the sale of shares and hence the expenditure incurred was allowable is not accepted because the disallowance was 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest is allowable against income from other sources, the same cannot be allowed under the head capital gain. He also referred to Bombay High Court decision in the case of K.J. Somaiya Sons (P.) Ltd. v. CIT [1985] 155 ITR 605 in support of disallowance by the Assessing Officer. He further submitted that the Mumbai Bench decision is not an authority on the issue in as much as it has not discussed the implication of section 14A in right perspective and that it was otherwise also a case of trader in shares. It has not taken into consideration the legal position that a shareholder and the company are two distinct 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred for earning and making income from dividend. In this, the Supreme Court held that when the assessee borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those monies, the interest on borrowed monies for investment in shares which had not yielded any dividend was admissible as a deduction under section 57(iii) of the Income-tax Act, 1961 in computing its income from dividend under the head "Income from 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be allowed only against dividend income which is includible in the total income for the purpose of chargeability to tax under the Act and not otherwise. The expression "for the purpose of charge of income tax and computation of total income" used in section 14 amply clarifies the intention of the Legislature and the Scheme of the Income-tax Act, 1961. Thus, there could be no such intention of the Legislature and a Scheme of the Act to allow deductions related to income not forming part of the total income, against the income includible in the total income and chargeable to tax. This 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 capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving income which would fall within the head 'Income from business or profession' or any of the other heads specified in section 14 of the Act. The assessee company has admittedly claimed deduction of interest against income from other sources, i.e. dividend and interest income, but such dividend and interest income is not earned from the investment made in the shares of Telerad (P.) Ltd. or any other investment made which is relatable to the transaction in question. Therefore, on a plain reading of the provision in the light of the facts found there is no making or earning of 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was acting as managing agent of Godavari Sugar Mills Ltd. during the relevant years. It also derived income from certain investments. It also received interest on advances made by it. On March 30,1967, the assessee purchased from Mr. K.J. Somaiya 2500 shares of Godavari Sugar Mills Ltd. for a sum of Rs. 3,50,000. The assessee did not have funds immediately available for paying the full consideration. It was, therefore, agreed that the purchaser should pay the price in instalments carrying interest at 10 per cent. Immediately on acquisition, and it is agreed that the time 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 reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income under the Income-tax Act." 16. It is thus clear, that from whatever angle one may look at the transaction, result is the same, viz., when the dividend is not taxable at all, the interest pertaining to that would also not be allowable because there is no taxable income of the assessee against which such interest can be allowed. The another way to consider the issue is that if interest is allowable, it would be allowable against dividend income and the net dividend income after allowing that, alone would be excluded from total income under section 10(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 purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also not the tax payable by the domestic company under section 115-O is paid out of the amount declared or distributed or paid by way of dividend to the shareholder. It is the tax paid with respect to and on the amount of dividend declared, and not out of the amount of dividends so paid to the shareholder. The tax so paid by the company cannot be regarded as tax paid by the shareholder as the both are distinct and separate legal and taxable entities as aforesaid. In our opinion, it would be wrong to say that the tax paid by the company under section 115-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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arate taxable entity a company is an assessee by itself under section 2(31) of the Act, and is chargeable to income-tax. As long back as in 1921 the Privy Council in IRC v. Blott the House of Lords [1921] 2 AC 171 held that "Plainly a company paying income tax on its profits does not pay it as an agent for its shareholder. It pays as tax payers, and if no dividend is declared the shareholders have no direct concern in the payment thereof. In another case of Hamilton v. IRC 1931 KB 492 it was observed that "the company is one tax payer and each individual 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the total income. It is assessee's own total income that is to be seen for applying the provisions of section 14A and not that of somebody else. Admittedly by virtue of section 10(33) dividend income is not includible/included in total income of an assessee shareholder. In other words by virtue of section 10(33) it does not form part of the total income of shareholder and, therefore, the expenditure incurred by the shareholder in earning that income would not be allowable. 24. In the light of the above let us discuss the decision of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td., the Hon'ble Apex Court held that the mere fact that the company has within its objects the dealing investment in shares does not give to the company the characteristics of a dealer in shares, but if other circumstances are proved it may be relevant for the purpose of determining the nature of the activities of the company. In the present case the assessee company actually carried out business activity during the year under consideration, which can be evidenced from the balance sheet for the FY ending on 31-3-1998. It could be observed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious business transactions as we have stated above. The assessee procured unsecured loans during the financial year and these sums were utilized for the purpose of the business of the assessee. The assessee company also made investments in shares and also earned dividend income, therefore, it cannot be said that the assessee company made short term advances. It also cannot be said that the assessee company was not carrying on the business systematically or in an organized manner. The assessee company was carrying on the business as an 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n amounts did not mean that that amount, when paid as income to the shareholders, could not be taxed as income in the hands of the shareholders. The character of the amount has been changed, it being now the income of the shareholders. This principle laid down by the Supreme Court in the above referred case has not been taken note of by the Mumbai Bench. Moreover, the settled position of law as discussed above in this order, with regard to the inter se relationship between the company and its shareholders as laid down by the Supreme 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 afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he matter and for the reasons given above we are of the considered view that the tax payable by the company under section 115-O on the amount of dividend declared, distributed or paid is not the tax paid for and on behalf of the shareholder on the dividend income received by the shareholder, and consequently the dividend income received by the shareholder has not suffered any tax in his hands because of tax paid by the company under section 115-O on the amount of dividend declared, distributed or paid. We therefore hold that 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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, 2002 with retrospective effect from 11-5-2001 to save certain completed actions otherwise. It reads as under: "Provided that nothing contained in section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increase the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001." 31. We can at this stage also look to the Memorandum explaining 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of certain expenditure under section 37 of the Act in computing its income under the head "Profits and gains of business or profession". The ITO allowed only so much of the expenditure as could be allocated to the taxable income and disallowable the rest of it which was referable to the non taxable income which was exempt under section 10(29) of the Act. On appeal, Supreme Court held that income from various ventures was earned in the course of "one indivisible business", the impugned order upholding 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 vi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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