TMI Blog2006 (12) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the Act are not applicable to the case of the appellant. Since the interest expenses was business expense. 3. The appellant prays that it be held that the disallowance of interest expenses as above be deleted. (II) 1. The CIT(A) erred in confirming disallowance of stamp duty of Rs. 71,156. 2. He failed to appreciate and ought have held that the expenditure was for the purpose of the appellant and hence was fully allowable. 3. The appellant prays that the above expenses of stamp duty be fully allowed as business expenses of the company. (III) 1. The CIT(A) erred in not considering the cost of shares on account of stamp duty as addition to closing stock of shares. 2. He failed to appreciate and ought to have held the claim for treating the same as addition to closing stock of shares was valid and tenable and should be allowable. 3. The appellant prays that the claim be allowed. (IV) 1. The CIT(A) erred in confirming non-allowance of the claim for the carry forward of business loss as claimed. 2. He failed to appreciate and ought to have held the claim for allowance of carried forward of business loss was valid and tenable and should be allowed. 3. The appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of shares by the assessee as an investment and not as a business transaction. The assessee placed reliance upon the order of the Tribunal in the case of Mafatlal Holdings in which it has been held by the Tribunal that the investment company need not to pay tax on interest payable on loans. The CIT(A) examined the issue in the light of the provisions of section 14A of the I.T. Act and confirmed the disallowance after having observed that borrowed funds were utilized for investment in shares. 5. Aggrieved, the assessee has preferred an appeal before the Tribunal and placed heavy reliance upon the judgment of the Apex Court in case of Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450 in which it has been held that when assessee is carrying on one indivisible business in various ventures and some amongst them yield taxable income and others do not, the entire expenditure is a permissible deduction without any apportionment. During the course of hearing, the ld. Counsel for the assessee further contended that he has borrowed the funds to acquire the controlling shares of Blue Star Ltd. and M/s. Ashok Sunil Co. to protect the hostile take over of the company. Sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orpn. ( 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. Through section 14A it has been made emphatically clear by the Legislature that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to income which does not fall part of the total income under the Act. When this provision with retrospective effect has prompted the department to reopen those completed assessment in which principle laid down by the Apex Court has been followed, this has created hardship to tax payers. The Board has taken note of the hardship and issued a Circular No. 11 of 2001 directing the department not to reopen the assessment which has become final before 1st April, 2001 in which expenditures incurred towards exempt income was allowed following the judgment of the Apex Court in the case of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the dividend amount received in his hands i.e., only Rs. 900 and he is not concerned about the 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 payer. In support of his contention the learned DR has also placed reliance upon the following judgments : 1. Chinai Co. (P.) Ltd. v. CIT [1994] 206 ITR 616 (Bom.) 2. Harish Krishnakant Bhatt v. ITO [2004] 91 ITD 311 (Ahd.) 3. Nawn Estates (P.) Ltd. v. CIT [1977] 106 ITR 45 (SC) 4. Everplus Securities Finance Ltd. v. Dy. CIT [2006] 101 ITD 151 (Delhi). 7.1 The learned DR further contended that the queries raised by the learned counsel for the assessee during the course of argument were all answered by the Tribunal either in the case of Harish Krishnakant Bhatt ( supra ) or Everplus Securities Finance Ltd. s case ( supra ). Since the Tribunal has already concluded that the interest on borrowed funds, which were invested in shares either for acquiring controlling sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 the taxable income. This is against the basic principle of taxation whereby only the net income i.e. the gross 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. s case ( supra ) 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 or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment or reducing the refund already made or otherwise incurring the liability of the assessee under section 154, for any assessment year beginning on or before 1-4-2001. 9. From a careful reading of the various Board Circulars with regard to section 14A it 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 on by the assessee relate to the pre-amendment period and were rendered following the judgment of Supreme Court in the case of Indian Bank Ltd. ( supra ) and Rajasthan State Warehousing Corpn. s case ( supra ), which cannot be relied on in the light of newly inserted section14A of which object was to nullify the effect of the judgments of the Apex Court. 10. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instant case since the dividend income earned on investment in shares is exempted from tax by virtue of section 10( 33 ), any expenditures incurred to earn the dividend income is 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. This aspect was also examined by the Tribunal s Ahmedabad Bench in the case of Harish Krishankant Bhatt ( supra ) in which it has been held that the dividend income is now exempted from tax by virtue of section 10( 33 ) and therefore as a consequences thereof, the interest paid on borrowed capital utilized in purchase of shares held as investment, being the expenditure incurred in relation to dividend income not forming part of assessee s total income, cannot be allowed as deduction. The relevant observations of the Tribunal are extracted here under : "The shares were acquired by the assessee in earlier year when dividend was taxable under the head "Other sources" under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment. The dividend income is now exempted from tax by virtue of section 10( 33 ) and, therefore, as a consequence thereof, the interest paid on borrowed capital utilized in purchase of shares held 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 be also 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 IT Act even without the existence of section 14A with retrospective effect from 1st April, 1962. The tax payable by the domestic company under section 115-O is paid not 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 both are distinct and separate legal and taxable entities as aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in holding that the only income arising from holding of the shares as investment was the dividend income which was clearly assessed under the head "Income from other sources". The said facts clearly showed that the assessee claimed the dividend income of Rs. 20,00,690 exempted under section 10(33) in the computation of income for the purpose of filing the return of income. The assessee conceded that the main activity of the company for making investment in shares of group company was to acquire and retain control of the group companies. The question that required to be considered was as to whether that activity itself constituted a business when the real intention of the company was not to earn profit but to acquire and exercise control of the group companies. In order to constitute activity of the assessee for carrying on the business, it is essential that such activity must be with a motive of earning profit. Such learning of profit should be by the company itself and not by the other group company. The issue came to be considered by the Delhi High Court in the case of Bharat Development (P.) Ltd. v. CIT [1982] 133 ITR 470/[1980] 4 Taxman 58 wherein it was observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elf, it would not prove that the assessee would earn any profit out of providing credit facilities to other group of companies. Since no trading activity had been conducted during the year under consideration, it was simpliciter clear that the assessee made investment for the purpose of earning dividend which was ultimate source of income during the year under consideration. The submission of the assessee that it made investment in the equity shares for the purpose of acquiring and controlling the management of J group of companies because according to the assessee no profit was earned from some of the other companies by way of dividend for several years, could not be accepted. The facts and the circumstances clearly proved that the purpose of the assessee was to earn the dividend because there was not element of business activity for the purpose of earning profit in the year under consideration. The only source of income of the assessee was dividend earned by the assessee from other companies in whose shares had been made out of borrowed funds. Merely because the assessee had shown the investment of the shares as stock-in-trade in the balance sheet that, by itself would not prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aying down that no deduction would be allowed in respect of the expenditure incurred by the assessee in relation to the income, which does not form part of the total income under that head. The assessee was, therefore, not entitled to the said deduction of interest under section 36(1)( iii ). The authorities below, therefore, rightly disallowed the amount against the assessee. It was established clearly on record that entire borrowed unsecured loans were invested in the purchase of equity shares upon which the assessee paid interest of Rs. 3,93,69,566 on the said loans. It was also established that the dividend income of Rs. 20,03,690 was earned by the assessee out of the investment in shares. Merely because the assessee did not earn dividend out of the investment in certain shares, that by itself, would not prove that the provisions of section 14A were not applicable in the instant case. It is not a hard and fast rule that on each and every investment in shares, the assessee would earn dividend. The earning of the dividend is not certain, unless the concerned company declared and distributed the dividend because it depends on various factors. The established facts were that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a business activity of the assessee, is concerned, we find that the business has been defined under section 2( 13 ) of the Income-tax Act, according to which, definition of business in the clause is an inclusive one and not exhausted. The enumerated four items i.e., trade, commerce or manufacture and any adventure or concern in the name of trade, commerce or manufacture are the major heads in the business but they do not exhaust all the activities to be reckoned in the business. It has been also made clarified by the Apex Court in the case of Bengal Assam Investors Ltd. v. CIT [1966] 59 ITR 547 that mere holding of investment would not by itself lead to the inference that the person holding the investment carries on business. Therefore, apart from showing investment it is essential to establish that transactions have been carried out in relation to the investment in the normal course of business and in the case of shares held as investment it is essential to prove that the holder of the shares has been carrying on business in respect of those shares, otherwise the profit or loss on the sale of shares cannot be claimed as falling under the head Business nor can any expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny business during the relevant previous year. The relevant observations of the jurisdictional High Court are extracted here under to understand the controversy raised before them : "It was submitted that, although the managing agency had come to an end, certain obligations of the assessee-company as managing agents remained to be fulfilled; such as an obligation to ensure that the accounts for the period during which they had functioned as the managing agents were presented and accepted at the next annual general meeting to be held in 1970. This does not lead to the conclusion that the business of managing agency continued during the year 1970. A mere obligation to have the accounts presented and passed at the annual general meeting is not enough to hold that the business of managing agency continued. Even after the cessation of the business of the managing agency, certain obligations may be required to be carried out during the next year. This does not mean that the business of managing the company, which is the essential nature of a managing agency business, continues. In fact, this would be in violation of the statutory prohibition against continuation of managing agency. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t referred to by the parties and we find that most of the queries with regard to the hardship being faced by the assessee in application of provisions of section 14A of the Income-tax Act raised during the course of argument were already answered by the Tribunal either in the case of Harish Krishnakant Bhatt or in the case of Everplus Securities Finance Ltd. 16. Turning to the case in hand in the light of above discussions we are of the view that whatever income is generated on this investment by way of dividend that is exempted under section 10(33) of the Act and in that case the interest expenditure incurred on the borrowed funds which were invested in shares is not allowable against the dividend income or other income of the assessee in view of the provisions of section 14A of the Income-tax Act. If the assessee succeeds in proving that by having a controlling shares in the group companies it earns this much of profit, which is chargeable to tax, the pro rata interest expenditure may be allowed to be deducted but it has not been proved so far. In these circumstances, we are of the view that after the insertion of section 14A one has to look to the investment and income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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