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TMI Blog2006 (11) TMI 362X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in the business of providing financial services like commercial vehicle financing, equipment finance, advances against financial assets and inter-corporate loans and deposits. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee had earned dividend of Rs. 4,85,24,362 which was exempt from tax. Taking note of section 14A of the Income-tax Act, he called upon the assessee to furnish the details of expenditure incurred in earning the aforesaid dividend and also to explain as to why expenditure on pro rata basis should not be apportioned to the earning of the aforesaid dividend. In reply, the assessee submitted before the Assessing Officer that it had not incurred any expenditure in earning the aforesaid dividend and hence the pro rata basis could not be applied to allocate the expenditure for earning the said dividend. In the absence of details, the Assessing Officer applied pro rata basis for allocating the total expenditure of Rs. 90,64,63,336 between exempt income (i.e., dividend) and non-exempt income in the ratio of their receipts (total receipts being Rs. 1,19,48,19,592 including dividend receipts of Rs. 4,85,24,362). In this mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies. The assessee-company was having capital far and excess of the investment made on which the dividend income was received. Moreover, it has been held by the various courts that proportionate disallowance of expenses is not permissible. The findings of the ld. CIT(A) are upheld and the third ground is dismissed." 7. He also invited our attention to another order dated 19-1-2006 passed by this Tribunal in the Department's appeal in the assessee's case for assessment year 1999-2000 in which the earlier order of the Tribunal for assessment year 1998-99 has been followed. 8. 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 would ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auses of section 14A) of section 14A. The scope and effect of the insertion of section 14A, with retrospective effect from 1-4-1962, in the Income-tax Act by the Finance Act, 2001 have been explained in para 25 of Circular No. 14 of 2001 issued by the Central 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 principles 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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, 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 prohibitin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment 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 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] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey 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. 15. 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. 16. In W.H. Cockerline and Co. v. IRC [1930] 16 TC 1 (CA) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Sadashiva Sinai Narcornim AIR 1975 SC 1843, 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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