TMI Blog2007 (5) TMI 354X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, the ld. Authorized Representative for the assessee invited our attention to the order dated 19-12-2006 passed by this Tribunal in the Department s appeal in the assessee s case for assessment year 1998-99 in which identical issue has been decided against the Department with the following observations : "4. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the Tribunal order relied upon by the ld. Authorized Representative for the assessee. We find that the ld. CIT(A) in this year had decided the issue by following this Tribunal order in assessee s own case for assessment year 1997-98. In fact, the Assessing Officer has also decided this issue by following the assessment order in assessment year 1997-98. In assessment year 1997-98, the Tribunal has decided the issue in favour of the assessee and it was held that interest on principal amount is also admissible to the assessee as per decree of Bombay High Court even though the provision for interest was not made in the accounts. Ld. Departmental Representative of the revenue could not point out any reason as to why contrary view, should be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the provisions of sub-sections (2) and (3) of section 14A of the Income-tax Act. The ld. Counsel for the assessee submitted that the matter could be restored to the file of the Assessing Officer for deciding the matter afresh. 8. There are several orders of this Tribunal dealing with the issue under consideration. For the sake of brevity, we shall refer to only one decision of this Tribunal, i.e., the decision in Kalpataru Construction v. Dy. CIT [IT Appeal No. 7160/Mum./2002], in which identical issue has been considered and disposed of with the following observations : "6. We have heard both the parties and considered their submissions including the judicial authorities cited by them. Short issue in the matter before us is whether the provisions of section 14A empower the Assessing Officer to make proportionate allocation in respect of the expenditure incurred in relation to exempt income and consequentially take the same into account for computing the exempt income and, if so, whether the mechanism for computing allocation of such expenditure as provided in sub-section (2)/(3) of section 14A (inserted by the Finance Act, 2006) would apply to all pending matters or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntral Board of Direct Taxes, which reads as under: 25. No deduction for expenditure incurred in respect of exempt income against taxable income. 25.1 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 principals 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. 25.2 Through Finance Act, 2001, a new section 14A has been inserted so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expense, educational expense, entertainment expense, extraordinary expense, fixed expense, funeral expense, general administrative expense, medical expense, moving expense, operating expense, ordinary and necessary expense, organizational expense, put-of-pocket expense, prepaid expense, travel expense. The term "expenditure" occurring in section 14A would thus take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. The term "incur" has been defined at page 771 of the aforesaid dictionary as follows: "incur, vb. To suffer or bring on oneself (a liability or expense)." One of the meanings given to the word "relate" under the head "Law" at page 2534 in " The New Shorter Oxford English Dictionary " (1993 Edition) is "Have some connection with, be connected to." The phraseology used in section 14A prohibiting the deduction in respect of expenditure incurred by the assessee in relation to exempt income is thus wide enough to cover all forms of expenses provided they have some connection with the exempt income. This is based on the principle that expenses must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. It is therefore not correct to say that dividend income can be earned by incurring on or nominal expenditure. This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in Southern Petro Chemical Industries v. Dy. CIT [2005] 93 TTJ (Chennai) 161. After comprehensive consideration of all the relevant aspects of the case including the provisions of law, the Chennai Bench has held that investment decisions are very strategic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. In Harish Krishnakant Bhatt v. ITO [2004] 91 ITD 311 (Ahd.), the Ahmedabad Bench of this Tribunal has held that, the dividend income being exempt under section 10(33), the interest on capital borrowed for acquisition of relevant shares yielding such dividend cannot be allowed deduction b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. The procedure for computation of disallowance has now been provided in sub-sections (2) and (3) of section 14A of the Income-tax Act. It is no longer open to the Assessing Officer to apply his discretion in computing the disallowance or make ad hoc disallowance under section 14A. Substantive provisions are contained in sub-section (1) of section 14A prohibiting deduction in respect of expenditure incurred in relation to exempt income while procedural provisions regarding computation of the aforesaid disallowance are contained in sub-sections (2) and (3) thereof. Sub-sections (2) and (3) seek to achieve the underlying object of section 14A(1) that any expenditure incurred in relation to exempt income should not be allowed deduction. It is fairly well-settled by a catena of decisions that procedural provisions apply to all pending matters and that the rule against retrospectivity does not hit them. 14. In W.H. Cockerline Co. v. IRC [1930] 16 TC 1 (CA) at 19, LordHanworth quoted with approval the following passage from the judgment of Sargant L.J.: "The liability is imposed by the charging section, namely, section 38, the words of which are clear. The subsequent provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 447, it is stated: "Procedure and practice is the mere machinery of law enforcement. As Ormrod L.J. said: The object of all procedural rules is to enable justice to be done between the parties consistently with the public interest ." In Jose Da Costa v. Bascora Sadashiva Sinai Narcornin, AIR 1975 SC 1843; [1976] 2 SCC 917 at p. 925, the Hon ble Supreme Court has held at page 1849 of AIR 1975 SC: "Before ascertaining the effect of the enactments aforesaid passed by the Central Legislature on pending suits or appeals, it would be appropriate to bear in mind two well-established principles. The first is that while provisions of a statute dealing merely with matters of procedure may properly, unless that construction be textually inadmissible, have retrospective effect attributed to them, provisions which touch a right in existence at the passing of the statute are not to be applied retrospectively in the absence of express enactment or necessary intendment ( See Delhi Cloth and General Mills Co. Ltd. v. ITC AIR 1927 PC 242). The second is that right of appeal being a substantive right the institution of a suit carries with it the implication that all successive appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X
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