TMI Blog2006 (10) TMI 253X X X X Extracts X X X X X X X X Extracts X X X X ..... on (2)/(3) of section 14A inserted by the Finance Act, 2006 deserve to be noted. 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 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. Thus, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure for earning the aforesaid dividend income. The Assessing Officer took note of section 14A of the IT Act and allocated a sum of Rs. 2 lakhs for earning the aforesaid dividend income. In other words, he disallowed a sum of Rs. 2 lakhs on the ground that it was attributable to earning of dividend income under section 14A of the I.T. Act. The disallowance so made by the Assessing Officer was confirmed by the CIT(A). 4. In support of appeal, the ld. counsel for the assessee submitted that the rule of proportionality of expenses was not applicable under section 14A of the IT Act and hence the impugned disallowance confirmed by the CIT(A) should be deleted. In support of his submissions, the ld. counsel relied on the decisions in CIT v. General Insurance Corpn. of India [2002] 254 ITR 203, 204 (Bom.); CIT v. United Collieries [1993] 203 ITR 857 (Cal.); CIT v. Central Bank of India [2003] 264 ITR 522 (Bom.) and Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450 (SC). 5. In reply, the ld. Departmental Representative supported the orders passed by the Departmental authorities and submitted that section 14A barred deduction of any expenditure incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in respect of such expenditure in relation to income which does not form part of the total income under this Act.** (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.** Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning or before the 1st day of April, 2001.*** [*Inserted as section 14A (without numbering) in the IT Act by the Finance Act, 2001 w.r.e.f. 1-4-1962. **Inserted by the Finance Act, 2006 and consequently all the clauses of section 14A were numbered.*** Inserted by the Finance Act, 2002.] 8. In the matter before us, we are not concerned with the Proviso to section 14A. We are concerned with sub-section (1) [as originally inserted (without numbering of the sub-section) by the Finance Act, 2001 with retrospective effect from 1-4-1962 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. It treats both of them as separate classes for computation of income after allocation of expenditure relating thereto and mandates that no deduction in respect of any expenditure shall be allowed against taxable income which is incurred in relation to exempt income. The underlying object is to compute both the exempt income and taxable income correctly, which is possible only after the expenditure incurred in relation thereto is allocated to them. In other words, section 14A bars the deduction of expenditure incurred in relation to exempt income out of taxable income, as this would have the effect of artificially inflating the exempt income and thereby deflating the taxable income. 10. The prohibition for allowing the deduction under section 14A for and from assessment year 1962-63 is "in respect of expenditure incurred by the assessee in relation to income" which does not fall part of the total income. The term "expenditure" has been defined at page 598 of Black s Law Dictionary (Seventh Edition) thus : "1. The act or process of paying out; disbursement. 2. A sum paid out." The term "expense" has been defined at the same page of the aforesaid dictionary as follows : "n. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of computation of income. The system postulates the existence of tax insofar as monies due and payable by the parties to whom they are debited. Therefore, under the mercantile system of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses). Under the mercantile system of accounting, this matching is required to be done on accrual basis. Under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assessee is following the mercantile system of accounting. This matching concept is very relevant to compute taxable income. . . ." 11. It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in CIT v. United General Trust Ltd. [1993] 200 ITR 488 , the Calcutta Bench of the Tribunal has also held that the interest paid by the assessee being attributable to the money borrowed for the purpose of making the investment which yielded the dividend and other expenses incurred in connection with or for making or earning the dividend income can be regarded as expenditure incurred in relation to dividend income. In Everplus Securities Finance Ltd. v. Dy. CIT [2006] 102 TTJ (Delhi) 120 , the Delhi Bench of this Tribunal has held that merely because the assessee did not earn the dividend out of investment in certain shares does not imply that the provisions of section 14A would not apply to that extent. In Asstt. CIT v. Premier Consolidated Capital Trust (I) Ltd. [2004] 4 SOT 793 , the Mumbai Bench of this Tribunal has held that the Assessing Officer is justified in attributing a part of the financial and administrative expenses as expenditure incurred in relation to exempt income and disallowing the same in view of the provisions of section 14A. 12. Keeping in view the provisions of section 14A as also the aforesaid decisions of the co-ordinate Benches of this Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WT [1966] 59 ITR 767 (SC) at 793, Hon ble Mr. Justice Shah observed : "Section 7(2) merely provides machinery in certain special cases for valuation of assets; and it is from the aggregate valuation of assets that the net wealth chargeable to tax may be ascertained. This is an artificial rule adopted with a view to avoid investigation of a mass of evidence which it would be difficult to secure or, if secured, may require prolonged investigation." Though the aforesaid observation was part of the minority opinion, there is, however, nothing said to the contra in the majority view. In Associated Cement Co. Ltd. v. CTO [1981] 48 STC 466, the Hon ble Supreme Court has held : "It is settled law that a distinction has to be made by courts while interpreting the provisions of a taxing statute between charging provisions which impose the charge to tax and machinery provisions which provide the machinery for the quantification of the tax and the levying and collection of the tax so imposed. While charging provisions are construed strictly, machinery sections are not generally subject to a rigorous construction. The courts are expected to construe the machinery sections in such a manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was not the intention of Parliament." All the aforesaid observations have been cited, with approval, by the Hon ble Supreme Court in CWT v. Sharvan Kumar Swarup Sons [1994] 210 ITR 886 . 15. In view of the aforesaid, 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. We therefore set aside the orders passed by the CIT(A) and the Assessing Officer in this behalf and restore the matter to the Assessing Officer for a fresh decision in the light of the provisions of section 14A including sub-sections (2) and (3) thereof. 16. Ground No. 2 of the concised grounds of appeal read as under : "2. Disallowance out of interest paid Rs. 19,78,127 ( a )The Hon ble CIT(A) erred in upholding the addition of Rs. 19,78,127 out of interest paid made by the Assessing Officer on the ground that this is covered against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts could not be realized, the assessee, in terms of the agreement, would be responsible for the same and the amount of consideration would stand modified accordingly. It was the case of the assessee before the Departmental authorities that the agreed consideration was a variable amount subject to the ceiling of Rs. 1.25 crores. It was further pointed out that the amount of consideration was finally agreed upon between the parties in April 2001 at Rs. 1 crore on account of various unrealized/unrealizable current assets and then provided liabilities which was also confirmed by the parties in writing vide assessee s letter dated 2-4-2001 addressed to M/s. Teva Health Care Private Ltd. According to the assessee, the consideration was shown at Rs. 1.25 crores in the return of income as it was filed before its crystallization in April 2001. The case of the assessee before the Assessing Officer was that the amount of consideration should be taken at Rs. 1 crore. The Assessing Officer, however, treated the sum of Rs. 1.25 crores as consideration instead of taking the actual consideration of Rs. 1 crore. On appeal, the ld. CIT(A) rejected the plea of the assessee on the ground that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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