TMI Blog2007 (1) TMI 284X X X X Extracts X X X X X X X X Extracts X X X X ..... ance or make ad hoc disallowance u/s 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. We hold that the provisions for quantification of disallowance as contained in sub-sections (2) and (3) of section 14A are procedural and therefore apply to all pending matters. It is no longer open to the Assessing Officer to make disallowance according to his own discretion or on ad hoc basis. He is statutorily required to compute the disallowance in the manner provided by sub-sections (2) and (3) of section 14A. All these aspects have neither been considered by the Assessing Officer nor the CIT(A) while making the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT(A) has erred in deleting the addition of Rs. 10,34,730/- made by the Assessing Officer on account of disallowance of interest being the expenditure related to earn dividend income and claimed exempt under section 10(3) of the Act within the meaning of section 14A. 5. We have heard the parties. The assessee has claimed exemption in respect of gross amount of dividend amounting to Rs. 32,61,650/- under section 10( 33 ) of the IT Act. The Assessing Officer noted that the assessee had claimed exemption on gross amount of dividend without allocating any expenditure in relation thereto. The Assessing Officer further observed that the assessee had borrowed funds to the extent of Rs. 31,70,49,647/- out of total funds of Rs. 89,36,51,771/- which work out to 35.47% of total funds inclusive of share capital, reserves and surplus. The Assessing Officer noted that total investment in shares was Rs. 4,40,00,000/- and that the assessee had paid total interest of Rs. 2,10,52,667/- during the year under appeal on the entire borrowed funds amounting to Rs. 31,70,49,647/-. The Assessing Officer calculated the average cost of borrowing at 6.63% which he allocated towards the investment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out. The term expense has been defined at the same page of the aforesaid dictionary as follows : An expenditure of money, time, labour, or resources to accomplish a result; esp., business expenditure chargeable against revenue for a specific period. - expense, vb. Cf. COST (1) . The expense has many forms, namely, accrued expense, administrative expense, business expense, capital expense, capitalized expense, current expense, deferred 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, pre-paid 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses involved in earning the dividend income are those incurred on collection of dividend or on encashing a few dividend warrants. A company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares 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 no 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] 3 SOT 157. 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 decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of section 14A as also the aforesaid decisions of the co-ordinate Benches of this Tribunal, we hold that all expenses connected with the exempt income have to be disallowed under section 14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial in accordance with law. In this connection, the provisions of sub-section (2)/(3) of section 14A inserted by the Finance Act, 2006 deserve to be noted. 9. The procedure for computation of disallowance has now been provided in sub-sections (2) and (3) of section 14A of the IT 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 provi- sions 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 fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The courts are expected to construe the machinery sections in such a manner that a charge to tax is not defeated. Bennion s Statutory Interpretation (First edition, page 446, paragraph 191) lays down as follows : Because a change made by the legislator in procedural provisions is expected to be for the general benefit of litigants and others, it is presumed that it applies to pending as well as future proceedings. At 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 Sadasiva Sinai Narcornim AIR 1975 SC 1843, the Hon ble Supreme Court has held at page 1849 : 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, prov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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