TMI Blog2006 (2) TMI 495X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany. 3.The appellant prays that it be held that the said interest expense of Rs. 19,21,182 be allowed as business expenditure. II.1.The CIT(A) erred in confirming restriction of exemption for dividend income under section 10( 33 ) of the Income-tax Act, 1961 at Rs. 10,29,437 against a claim of Rs. 29,50,619. 2.He failed to appreciate and ought to have held that the question of considering restriction of exemption of dividend income under section 10( 33 ) does not arise since the expenses on account of interest was fully allowable as business expenditure. 3.The appellant prays that it be held that the claim for exemption under section 10( 33 ) be fully allowed at Rs. 29,50,619. I.T.A. No. 1061/Mum./2003 "I.1The CIT(A) erred in confirming the order of the Income-tax Officer in relation to disallowance of interest expenses purportedly relatable to earning of income to the extent of Rs. 18,57,346. 2.He failed to appreciate and ought to have held that no such disallowance was called for since the appellant had paid interest on borrowings which were used for the purpose of Investment and Finance activities of the company and which was the business of the company and hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares of Blue Star Ltd. as stock-in-trade. The assessee has also carried finance activity, which included lending money to others. For its business purposes, the assessee has borrowed money, as such the interest on the same was allowable as business expenditure. The assessee has received dividend income on the aforesaid shares. He placed a reliance upon the judgment of the Supreme Court in the case of CIT v. Indian Bank Ltd. [1965] 56 ITR 77, CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450 in support of the proposition that wherein assessee carries as an indivisible business and a part of the business is not assessable under the Act, the interest on money borrowed would be allowable in its entirety. It was further contended that in case of a composite business, provisions of section 14A shall not be applicable. The CIT(A) re-examined the issue and after having relied upon the provisions of section 14A has held that Assessing Officer has rightly disallowed the pro rata interest on monies borrowed for carrying interest. 6. Now the assessee has preferred an appeal before the Tribunal and placed he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the assessee has borrowed funds, out of which some part was invested on acquiring shares of M/s. Blue Star Ltd. and some were utilized to advance loans. Before any of the lower authorities the assessee has not raised any plea or argument that it has made the investment in shares of M/s. Blue Star Ltd. to have the controlling shares in the company. This argument is raised for first time before the Tribunal and since it requires the factual verification, it cannot be entertained at this stage. So far as the judgment of the Apex Court in the case of Rajasthan State Warehousing Corpn. ( supra ) is concerned, the ld. Departmental Representative has invited our attention to the object of introduction of section 14A with the submission that section 14A have been inserted by the Finance Act, 2001 with retrospective effect from the 1st day of April, 1962 to nullify the decision of the Supreme Court in the case of Rajasthan State Warehousing Corpn. ( supra ). Through section 14A it has been made emphatically clear by the Legislature that for the purpose of computing total income under Chapter XIV, no deduction shall be allowed in respect of the expenditure incurred by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax in the hands of the payer. The ld. Departmental Representative further invited our attention to the observations of the Tribunal in the case of Mafatlal Holdings Ltd. ( supra ), in which the Tribunal has held that the dividend income received by the shareholder is non-exempted income after quoting an example that if total dividend declared by the assessee- company is Rs. 1,000 and the tax paid by the shareholder on this amount @ 10% then net income remains in the hands of the shareholder is Rs. 900 only with the submission that the shareholder is only concerned with the dividend amount received in his hands i.e. only Rs. 900 and he is not concerned about this amount which was declared by the domestic company and the interest paid thereon. The example quoted by the Tribunal before declaring the dividend income as non-exempted income is misquoted, as section 14A only talks about the income received by the recipient and not the amount paid by the payee. In these circumstances, the revenue authorities are justified in disallowing the claim of the assessee. 9. Having given a thoughtful consideration to the rival submissions and from the careful perusal of the orders of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income minus expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. To nullify the decision of the Supreme Court in Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450 in which it was held that the income of the assessee arises under any of the heads of the income but from different items i.e. different house properties of different securities etc., and income from one or more items alone is taxable whereas income from other items is exempt under the Act, the entire permissible expenditure in earning income under that head is deductible and that if assessee carries on business for various ventures, some of which yield taxable income and others do not and business is one indivisible, the entire expenditure of this indivisible business would be deductible, the Legislature has inserted section 14A by the Finance Act, 2001 with retrospective effect from 1st April, 1962, according to which, for the purpose 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. The scope an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has become abundantly clear that Legislature has no intent to allow any expenditure incurred in earning exempted income against the taxable income. The judgments relied upon by the assessee relate to the pre-amendment period and were rendered following the judgment of Supreme Court in the cases of Indian Bank Ltd. ( supra ) and Rajasthan State Warehousing Corpn. ( supra ), which cannot be relied on in the light of newly inserted section 14A of which object was to nullify the effect of the judgment. 11. We have also carefully examined the judgment of the Jurisdictional High Court in the case of CIT v. Amritaben R. Shah [1999] 238 ITR 777 (Bom.) in which the Hon ble Bombay High Court has categorically held that in order to get deduction under section 57( iii ) the expenditure should be incurred wholly and exclusively for the purpose of making or earning the income from other sources and that it should not be in the nature of capital expenditure. The shares in question were purchased by the assessee for the purpose of acquiring controlling interest in the company and not for earning dividend. That being so, the expenditure incurred by way of interest on the loan taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is taxable and non-taxable income for the purpose of section 14A one has to look the nature of receipts in the hands of the recipient and not in the hands of the payer. If income is non-taxable in the hands of the recipient, the provisions of section 14A would certainly apply and expenditure incurred in earning that non-taxable income will not be allowed to be deducted against the taxable income. If it is permitted it would be a violence to the newly inserted section 14A. In the instant case since the dividend income earned on investment in shares is exempted from tax by virtue of section 10(33), any expenditure incurred to earn the dividend income was not allowable against the taxable income of the assessee. In the instant case, since the interest expenditures are indivisible as the investments in shares and advancement of loan was made out of the common funds, the pro rata interest incurred on funds invested in shares, cannot be allowed against the interest income of the assessee. We, therefore, find no merit in the assessee s appeal. Accordingly, we confirm the order of the CIT(A) and dismiss the appeal of the assessee. 14. In the result, the appeal of the assessee is dism ..... X X X X Extracts X X X X X X X X Extracts X X X X
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