TMI Blog2008 (10) TMI 383X X X X Extracts X X X X X X X X Extracts X X X X ..... n-trade and earning profit on their trading, which income is otherwise taxable under the head Profits and gains of business or profession ( Business income ). HELD THAT:- On perusal of the section 14A reveals that any expenditure incurred in relation to income not forming part of total income has to be disallowed. Thus, the scope of this section entirely depends upon the meaning of the expression in relation to used by the Legislature in this section. Such expression has not been defined in the Act. In the case of Ahmed G.H. Ariff v. CWT [ 1969 (8) TMI 4 - SUPREME COURT] held that: It is well-settled that where the Legislature uses a legal term which has received judicial interpretation, the courts must assume that the term has been used in the sense in which it has been judicially interpreted. In view of the above legal position, it is held that the expression in relation to in section 14A of the Act must be understood in the same sense in which their Lordships of the Apex Court understood in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior [ 1970 (12) TMI 87 - SUPREME COURT] . Accordingly, the expression in relation to would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also be pointed out that section 14A was inserted with a view to overcome the effect of the decision of the Supreme Court in the case of Rajasthan State Warehousing Corpn.[ 2000 (2) TMI 5 - SUPREME COURT] . Disallowance u/s 14A, in the case of a dealer in shares - Generally, in our opinion, a dealer in shares does not acquire shares and securities to earn dividend income. The dominant and immediate object behind acquisition of shares is to earn profit on the sale of shares at the earliest point of time which is chargeable to tax under the Act. Sometimes, such person by chance may also get the dividend on the shares held by him as stock-in-trade . Since such dividend income is never intended at the time of purchase of shares, in our opinion, the connection between the expenditure incurred and the dividend income can be said to be incidental only since the dominant and immediate connection exists only between the expenditure incurred and profit on sale of shares. In our considered opinion, the disallowance u/s 14A can be made in such cases in respect of expenditure incurred. However, onus would be heavy on the revenue to establish such connection because the settled legal pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of investment is to earn the maximum dividend income. There is no other motive or intention in case of investment companies. Therefore, we are of the view that there did not exist any dominant and immediate connection between the interest paid and the taxable income. In fact, such connection existed between interest paid and the dividend income since the only motive/object was to earn the dividend income as is apparent from the amount of dividend received. Therefore, in our view, the disallowance under section 14A was justified. The orders of the ld CIT(A) in both the cases are therefore upheld. In the result, the appeal of the revenue in the case of M/s. Daga Capital Management (P.) Ltd. and the appeals of M/s. Maxopp Investments Ltd. and M/s. Cheminvest Ltd. are dismissed. Two Members Decision - Ld AM and Ld JM - We observe that the disallowance is contemplated in respect of expenditure incurred by the assessee in relation to the income which does not form part of the total income under this Act. When the language of section is clear and does not admit of any doubt whatsoever, we are bound to interpret it literally. It is trite law that so long as there is no amb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GUPTA AND R.S. SYAL, JJ. S.D. Srivastava for the Appellant. Vipul Joshi, Sameer Dalal, Ajay Vora and Rohit Jain for the Respondent. Mrs. K.C. Patel and Kunal Reshamala for the Interveners. ORDER Per K.C. Singhal, Vice President. - The Hon ble President, ITAT, vide order dated 4-7-2007 has constituted the Special Bench in the case of M/s. Daga Capital Management Pvt. Ltd., Mumbai to adjudicate upon the following issue : "Whether, in the facts and in the circumstances of the case and in law, the provisions of section 14A of the Income-tax Act, 1961, are applicable with respect to dividend income earned by the assessee engaged in the business of dealing in shares and securities, on the shares held as stock-in-trade and when earning of such dividend income is, therefore, incidental to trading in shares?" as well as to dispose of the appeal on merits. 2. Subsequently, the Hon ble President vide order dated 17-10-2007 has directed the Bench to dispose of the following appeals also : Sr. No. ITA No. Appellant Respondent State 1. ITA No. M/s. ITO, Ward 3(3), Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mind to earn lump sum dividend without contributing anything to the exchequer on account of income-tax. During the year, the assessee has not done any business in shares and securities except for few transactions and only income earned during the year is dividend income." In view of these observations, it was held by the Assessing Officer that provisions of section 14A of the Act became applicable. Consequently, the deduction of Rs. 9,58,325 in respect of interest payment was disallowed by the Assessing Officer. It may also be mentioned that loss of Rs. 2,86,240 in dealing of shares was however accepted by the Assessing Officer after considering the necessary details filed by the assessee. As a result thereof, loss of Rs. 3,29,455 was determined vide order dated 25-2-2003. 4. The assessment made by the Assessing Officer was challenged before the learned CIT(A) before whom it was contended ( i ) that main object of the assessee was to deal in shares and securities as was apparent from the Memorandum of Association, ( ii ) no adverse inference could be drawn merely from the fact that investments in the shares and securities was shown in the Balance Sheet under the head Inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being proportionate interest attributable to the investment in the unquoted shares of Rs. 27 lakhs, out of disallowance of Rs. 9,58,325 made by the Assessing Officer, without appreciating that the borrowed funds to the tune of Rs. 99,24,061 has been used for making investments in shares and securities and, therefore, the Assessing Officer rightly worked out the disallowance at Rs. 9,58,325 on the total investment of Rs. 99,24,061." However, it may be mentioned that assessee has accepted the order of the learned CIT(A) by not filing any appeal against the disallowance sustained by him. 6. When the appeal came up before the Division Bench, it was noticed that there was difference of opinion between the Benches on the issue involved in the appeal. The revenue had relied on the decision of the Tribunal dated 5-9-2006 in the case of Ridge Investment Co. (P.) Ltd. v. Jt. CIT [IT Appeal Nos. 4260-61 (Mum.) of 2003] as well as the decision of Delhi Bench of the Tribunal in the case of Ever Plus Securities Finance Ltd. v. Dy. CIT [2006] 101 ITD 151 wherein it was held that even if the main activity of the company was to make investments in holding company for retaining contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts relating to the appeal of M/s. Maxopp Investments Ltd., New Delhi, are these. The assessee is an investment company primarily holding shares in Max India Ltd. It declared profit of Rs. 1,28,81,291 as per the P L A/c which included dividend income of Rs. 49,90,860. The dividend income was declared as exempt from taxation under section 10( 33 ) of the Act. The perusal of the P L A/c also showed that assessee had received interest of Rs. 1,94,70,181 while the interest paid amounted to Rs. 1,16,21,168. It was also noted by the Assessing Officer that assessee had taken loans amounting to Rs. 8,33,40,000 against which the loans given by the assessee amounted to Rs. 14,62,85,000. The assessee was asked to show cause as to why the disallowance of interest could not be made under section 14A of the Act. The explanation of the assessee was that it had acquired the shares for selling it at a profit in future and not for earning dividend. According to the assessee, the dividend income was only incidental to such acquisition of shares. Consequently, no disallowance could be made under section 14A of the Act. However, the Assessing Officer applied the provisions of section 14A of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the intention of the Legislature is clearly evident from the Memorandum explaining the provisions contained in the Finance Bill wherein it was explained that only those expenses could be claimed as deduction which are incurred in relation to earning the taxable income. It was further submitted that the use of the expression only to the extent in the memorandum is clear indicator that only that part of expenses can be allowed as deduction which is related to the earning of taxable income. Accordingly, it was contended that when the income is exempt and does not form part of the total income then, no expenditure whether direct or indirect in relation to that income could be claimed as deduction. To put it differently, the expenses which are directly related to taxable income are to be allowed as deduction. 11. Apart from the above, the learned Sr. D.R. made various submissions which are being summarised below : "( a )that section 14A being the special provision of law will override the general provisions of law like section 36(1)( iii ) or section 57, etc. Therefore, even though the expenditure may be allowable under section 36(1)( iii ) or section 57 of the Act, it would st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in the case of Escorts Ltd. v. Union of India 199 ITR 44 SC. ( d )that section 14A being a special piece of Legislation will override the general provisions of law and consequently, the expenditure incurred in relation to exempted income would be disallowable even though such expenditure would have been allowable either under section 36(1)( iii ) or under section 37 or under section 57 or under any other section meant for computation of total income under either of the heads. Reliance is placed on the decisions of the Tribunal reported as Inshahallah Investments Ltd. v. ITO in 23 SOT 130 and Maruti Udyog Ltd. v. DCIT 92 ITD 119. ( e )that there can be no business in acquisition of shares for controlling group companies and consequently, expenditure by way of interest on borrowed funds utilised for acquisition of shares cannot be allowed as deduction even under section 36(1)( iii ) as held by the Tribunal in the case of Everplus Securities reported in 101 ITD 151 as well as the other Tribunal decisions namely Kanu Metals Pvt. Ltd. [ITA No. 7211/Mum./03, order dated 30-5-2008], Mohan T. Adwani Finance Pvt. Ltd. [ITA No. 1060/Mum./2003] and Mech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than disallowance must be made in accordance with sub-section (3) thereof. Similarly, if the Assessing Officer is not satisfied with the correctness of the claim of the assessee then having regard to the accounts of the assessee, disallowance can be made under sub-section (3) thereof. ( i )The following decisions were cited in support of the proposition that expenses which are direct/indirect, fixed or variable, managerial financial in relation to income not chargeable to tax are to be disallowed under section 14A of the Act : ( i ) Sunash Investment Co. v. ACIT 106 TTJ (Mum.) 855 ( ii ) Kalpataru Construction Overseas (P.) Ltd. v. DCIT (Mum.) 13 (SOT) 194 (2007) ( iii ) Conwood Agencies (P.) Ltd. v. ITO Wd. 9(1)(2), Mumbai-15 (SOT) 308(Mum.)(2007) ( iv ) Narotamdas Bhau v. ACIT - 16(2), Mumbai- 15 SOT 629 (Mum.) (2007) ( v ) D.J. Mehta v. ITO 107 TTJ (Mum.) 12 (2007) ( vi ) Rhythm Exports (P.) Ltd. v. ITO (SMC) 97 TTJ (Mum.) 493 (2005) ( vii ) Dy. CIT v. Tata Investment Corpn. Ltd. 295 ITR (AT) 330 (Mum.)(2007) ( j )That the decisions of the Hon ble Supreme Court in the cases of Rajasthan Warehousing Ltd. 242 ITR 450 and in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452. Accordingly, it has been pleaded that once the expenditure incurred produces taxable income, the inquiry must stop there itself. The intention is to be seen at the time when the expenditure is incurred. Proceeding further, it was also submitted that onus is on the department to prove that expenses were incurred in relation to the tax-free income since existence of such relation is a condition precedent for invoking the provisions of section 14A. Coming to the scope of the expression in relation to it was contended by him that remote connection is excluded as per the definition given in Law Lexicon. He also referred to the judgment of the Constitution Bench of eleven Judges in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior v. Union of India [1971] 1 SCC 85 wherein their Lordships by majority opinion held that such expression means dominant and immediate connection. In view of the same it is pleaded that any connection which is either incidental or ancillary or remote would be excluded from the scope of such expression. Accordingly, in the case of dealer in shares and sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny Ltd., has submitted before us as under : 1. Section 14A as it stood during the relevant assessment year did not provide for the method for calculation of disallowance under section 14A. 2. Method for computing disallowance under section 14A was first sought to be provided only with effect from 1-4-2007. 3. Notification No. 45/2008, dated 24-3-2008 now provides the method for computing disallowance under section 14A with effect from the date on which it is published in the Official Gazette. 4. Since no method for computing disallowance was provided prior to 1-4-2007/24-3-2008 as per the decision of the Hon ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 1 followed in CIT v. Infosys Technologies Ltd. [2008] 297 ITR 167 if the computational provisions fail no liability can be fastened on the assessee. 5. The above notification cannot be given retrospective effect as it is only for the first time vide the notification that the Assessing Officer gets the right to calculate the disallowance based upon the notification. 6. Without prejudice to above, even if it is assumed that the notification is to be applied retrospectively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of these facts, it was contended by him that no disallowance can be made under section 14A of the Act since expenditure was not incurred with a view to earn dividend income but to earn the business income on the sale of shares held as stock-in-trade. 16. Proceeding further, it was submitted that section 14A can be applied when it is established that - ( i ) the expenditure is incurred and ( ii ) such expenditure was incurred in relation to the income not liable to tax. Therefore, some inquiry must be made in this regard. Regarding the scope of the expression in relation to appearing in section 14A of the Act, he endorsed the arguments made by Mr. Vipul Joshi and also relied on the decision of the Hon ble Supreme Court in the case of Navin Chemical Mfg. Trading Co. Ltd. v. Collector of Customs [1993] 4 SCC 320 wherein the expression in relation to has been defined as a direct and proximate relationship. Further reliance has been placed on the decision of the Third Member of the Tribunal in the case of Wimco Seedlings Ltd. v. Dy. CIT [2007] 293 ITR 216 (AT)(Delhi) wherein the Tribunal was concerned regarding the scope of section 14A of the Act itself. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owable as deduction against his business income even though the dividend was assessable under the separate head. Reference was made to certain judgments of various High Courts i.e., CIT v. Rajeev Lochan Kanoria [1994] 208 ITR 616 (Cal.), CIT v. Jardine Henderson Ltd. [1994] 210 ITR 981 (Cal.), CIT v. Amritaben R. Shah [1999] 238 ITR 777 (Bom.) and the decision of the Tribunal in the case of ATE Enterprises v. Jt. CIT [2006] 102 ITD 110 (Mum.) wherein interest on borrowed capital was held to be deductible where the borrowed capital was utilised to purchase shares of different companies in order to acquire controlling interest. Lastly, it was submitted by him that decisions relied upon by the learned D.R. were distinguishable on facts. 17. Rival submissions of the parties have been considered carefully in the light of material produced before us and case law referred to. This Bench is required to define the scope of the provisions of section 14A of the Act which reads as under : "14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 14A as otiose/redundant which is not permissible in law. Hence, we do not find force in the contention of Mr. Patel that no disallowance can be made under section 14A if the deduction is permissible under section 36(1)( iii ) of the Act. Consequently, in the case of an assessee carrying on a business activity, any expenditure incurred by him even though allowable under section 36(1)( iii ) or section 37 can be disallowed under section 14A if such expenditure has been incurred in relation to the income not forming part of total income. 19. Coming to the scope of section 14A of the Act, the perusal of the said section reveals that any expenditure incurred in relation to income not forming part of total income has to be disallowed. Thus, the scope of this section entirely depends upon the meaning of the expression in relation to used by the Legislature in this section. Such expression has not been defined in the Act. However, we find that such expression has been judicially defined by the Constitution Bench of Eleven Judges of the Hon ble Supreme Court in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior ( supra ). Their Lordships considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Supreme Court in the case of Doypack Systems (P.) Ltd. v. Union of India [1988] 2 SCC 299 has been relied on by the revenue for the proposition that the expression in relation to would include direct as well as indirect connection. A perusal of this decision shows that it was rendered by Bench of two Judges without considering the decision of the Constitution Bench of Eleven Judges in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior ( supra ). It is a settled rule of precedence that in case of any conflict of opinion between the views expressed by different Benches of a Court then the view taken by the Larger Bench would prevail since the Division Bench cannot enlarge the scope of the decision rendered by the Larger Bench. Therefore, in our opinion, the later decision cannot be applied to determine the scope of section 14A of the Act. 23. Having held as above, the next question is how to determine the nature of the connection between the expenditure incurred and the income earned by the assessee. In our opinion, the answer to this question would depend upon the intention/object with which the expenditure was incurred. If the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the disallowance can be made under section 14A on proportionate basis in accordance with the provisions of sub-sections (2) and (3) of section 14A of the Act. At this stage, it may also be pointed out that section 14A was inserted with a view to overcome the effect of the decision of the Supreme Court in the case of Rajasthan State Warehousing Corpn. ( supra ). 25. In view of the above legal position, the next question which arises for our consideration is whether any disallowance under section 14A can be made in the case of a dealer in shares. Generally, in our opinion, a dealer in shares does not acquire shares and securities to earn dividend income. The dominant and immediate object behind acquisition of shares is to earn profit on the sale of shares at the earliest point of time which is chargeable to tax under the Act. Sometimes, such person by chance may also get the dividend on the shares held by him as stock-in-trade . Since such dividend income is never intended at the time of purchase of shares, in our opinion, the connection between the expenditure incurred and the dividend income can be said to be incidental only since the dominant and immediate connection exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us would be on the assessee to prove that expenditure was for the purpose of the business. Once this onus is discharged, it would shift to the Assessing Officer to establish that there exists dominant and immediate connection between expenditure incurred and income exempt from tax if section 14A is to be invoked by him. We hold accordingly. 27. Coming to the scope of sub-sections (2) and (3) of section 14A, we find that these are the procedural provisions for determining the disallowance of the expenditure in relation to income not forming part of the total income. These sub-sections provide the procedure for making disallowance under section 14A. The Hon ble Supreme Court, in the case of CWT v. Sharwan Kumar Swarup [1994] 210 ITR 886, has held that procedural law, generally speaking, is applicable to all pending cases since no person has a vested right in the procedure. In view of this legal position, we are in agreement with the contention of the learned Sr. D.R. that such provisions would be applicable to all pending matters. Therefore, the contention of Mr. Kunal Reshamwala, that provisions of sub-sections (2) and (3) of section 14A cannot be applied to earlier years ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in shares of these companies has been shown in the balance sheet, as trading assets while the investment in shares of all other companies has been shown as investments in unquoted shares. Further, interest relatable to unquoted shares has not been claimed as deduction in computing its income. Only the interest on borrowings relatable to acquisition of shares of Max India Ltd. and Gaylord Impex Ltd. has been claimed as deduction under section 36(1)( iii ) of the Act. Further, the assessee had sold some insignificant quantity of shares of Max India Ltd. in assessment year 1998-99 and the resultant profit on the sale of such shares had been shown as business receipt and the Assessing Officer had also accepted the same as business receipt chargeable to tax under section 28 of the Act. On these facts, undisputedly, the assessees were allowed deduction under section 36(1)( iii ) of the Act in respect of interest on borrowed capital utilised for acquiring shares of Max India Ltd. and Gaylord Impex Ltd. in the earlier years which is apparent from the assessment orders passed by the Assessing Officer. Therefore, it could not be contended by the learned D.R. that investment by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of holding investment in shares. After giving our due consideration to the facts of the case, we are unable to accept the contention of the learned counsel for the assessee for the reasons given hereafter. We have already held that disallowance under section 14A can be made only when there is dominant and immediate connection between the expenditure incurred and the tax free income and not otherwise. The factual details regarding holding of shares of Max India Ltd. by M/s. Cheminvest Ltd. is given below: Assessment Opening Purchase Bonus Sale of Year Balance of shares Shares shares 1997-98 4,75,865 Nil Nil Nil 1998-99 4,75,715 28,850 Nil 750 1999-2000 5,03,815 1,74,211 Nil Nil 2000-01 6,78,026 17,550 Nil Nil 2001-02 6,95,576 2,16,884 8,67,345 Nil 2002-03 17,79,805 Nil Nil Nil 2003-04 17,79,805 10,000 Nil Nil Note : The assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ad idem on certain issues. We are therefore, constrained to write separate order. 2. The factual matrix of the case, along with the submissions made by the rival parties have been aptly recorded by the Hon ble Vice President in his proposed order through paras 1 to 16. We adopt the same and proceed to give our decision on the issues raised in these appeals. 3. The core of controversy raised before us is to interpret section 14A of the Income-tax Act, 1961 (hereinafter called the Act ) for determining as to whether or not any disallowance of expenses is warranted under this section when the assessee is dealing in shares by way of purchase and sale and any dividend income, which is exempt under section 10( 33 ), is earned on the shares or other securities held by it as stock-in-trade. However, there is no controversy about the rightness in making the disallowance of expenses under section 14A when the shares and other securities are held as investment and not as stock-in-trade. The case of the revenue is that the disallowance is necessary under section 14A even when the shares are held as stock-in-trade. On the other hand, the view point of the assessee is that the main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne of its prescription, it would be beneficial to note down the background which led to the insertion of this section. 6. The Hon ble Supreme Court in the case of Indian Bank Ltd. ( supra ) was confronted with a situation in which the Indian Bank Limited carried on the business of banking and in the normal course of its business it received deposits from constituents and paid interest to them. It invested a large sum in securities both of the Central and State Governments. The interest on State Government securities was exempt from income-tax and super tax under the provisions of a Notification issued under section 60 of the Indian Income-tax Act, 1922. It bought and sold the securities and the profits and losses on purchase and sale of such securities were taken into account in computing the income under the head Business . It claimed deduction as interest paid to various depositors for a sum of Rs. 25.91 lakhs. The Income-tax Officer disallowed interest of Rs. 2.80 lakhs by calculating the proportionate amount which would be payable on the money borrowed for purchase of State Government securities. The Tribunal upheld the Income-tax Officer s stand on the ground that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claimed by the assessee following the above discussed two judgments and also laid down the following principles for allowing or denying deduction in respect of expenses vis-a-vis taxable or exempt income : ( i )if the income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head, whether or not computation under each head results in taxable income; ( ii )if the income of an assessee arises under any of the heads of income but from different items, e.g., different house properties or different securities, etc., and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible; and ( iii )in computing the "profits and gains of business or profession" when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Income-tax Act, 1961, will depend on : ( a ) fulfilment of requirements of that provision and ( b ) on the facts whether all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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. It is proposed to insert a new section 14A 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 relation to income which does not form part of the total income under the Income-tax Act. The proposed amendment will take effect retrospectively from 1-4-1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent assessment years." 11. After the Finance Bill getting approval of the Parliament and the President of India, Circular No. 14 was issued relating to the provisions of Finance Act, 2001 reported in 252 ITR (St.) 65, the relevant part of which is 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 exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the intention of the Legislature. Such a view was, therefore, sought to be invalidated with the insertion of the new section. 13. At this stage, it would not be out of place to consider the Heydon s Rule also known as the Mischief Rule which deals with ascertaining the correct intention of the Legislature by looking into the mischief that was sought to be remedied by the legislation. This rule basically comprises four things to be considered. ( a )what was the common law before the making of the Act; ( b )what was the mischief and defect for which the common law did not provide; ( c )what remedy the Parliament has appointed to cure the defect; and ( d )the true reasons of the remedy. 14. This rule contemplates in considering the position prevailing anterior to the amendment, which was intended to be rectified by way of amendment or insertion of a section and then considering the amendment as overruling the hitherto legal position. If a particular provision is enacted for getting rid of the existing law, as it is or as interpreted by the Courts, the new amendment would be construed as superseding the earlier prevalent view which was considered by the Legislatu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Hon ble Supreme Court in the case of Core Health Care Ltd. ( supra ) in support of his proposition. 17.2 Per contra , the learned Departmental Representative submitted that section 14A is fully applicable to all the heads in respect of which income is computed under the Act and it is not borne out from the section that it would have no application in respect of business income. 17.3 There is no squabble over the fact that when the assessee is engaged in the business of purchase and sale of shares, then the dividend income is assessable as business income and not as income from other sources. This view has been taken by the Hon ble Supreme Court in the above-noted celebrated case of Cocanada Radhaswami Bank Ltd. ( supra ) and host of several other High Courts. Unfortunately the arguments have departed from the real controversy before us which is not to determine the head under which dividend income would fall, but whether under section 14A applies to Business income or not. There is no denial of the fact that the dividend earned by the assessee from the shares held as stock-in-trade, prior to insertion of section 10( 33 ) exempting it from the taxation under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business, that is investing in shares held as stock-in-trade, the interest cannot be disallowed under section 14A. Reliance was placed on the judgment of the Hon ble Supreme Court in the case of Core Health Care Ltd. ( supra ) in which it has been held that in order to claim deduction under section 36(1)( iii ), the assessee should have borrowed capital and the purpose of the borrowing be for business which is carried on by the assessee. It has also been held in this case that the deduction cannot be denied if the borrowed capital is utilized for capital purposes. We observe that the assessment years involved in this case are between 1992-93 to 1997-98. It has further been made clear in this judgment that the proviso to section 36(1)( iii ), by which any interest paid in respect of capital borrowed for acquisition of an asset for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date first put to use shall not be allowed as deduction, would have only retrospective effect from assessment year 2004-05 and would not hold good for the assessment years in question. We respectfully bow before the verdict of the Hon ble Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the total income under this Act. The expenses falling under any head or section which are otherwise deductible as business expenditure or under other respective heads, would call for disallowance in view of the specific provision of section 14A to the extent these have been incurred in relation to the income exempt from tax. Recently the Hon ble Supreme Court in the case of Britannia Industries Ltd. v. CIT [2005] 278 ITR 546 had an occasion to deal with the disallowance of general expenses such as rents, repairs, maintenance and depreciation of premises used for the purposes of guest house under section 37(4). It was claimed on behalf of the assessee that these expenses such as rent, repairs, maintenance, depreciation, etc., are allowable under the respective sections and section 37(4) dealing with disallowances in respect of guest house cannot have any application. The Hon ble Supreme Court, jettisoning such a contention, held that if the Legislature had intended that deduction would be allowable in respect of all types of buildings/accommodations used for the purposes of business or profession, then the Legislature would not have felt the need to amend the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod of computing the expenditure incurred in relation to income which does not form part of the total income. Consequently, there is considerable dispute between the tax-payers and the Department on the method of determining such expenditure. In view of the above, it is proposed to insert a new sub-section (2) in section 14A so as to provide that it would be mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed. However, the Assessing Officer shall be required to adopt the prescribed method if having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income. It is also proposed to provide that 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. This amendment will take effect from 1-4-2007 and will, accordingly, apply in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2003-04. Gaining strength from this judgment, it was contend- ed by the ld. AR that since sub-sections (2) and (3) have been inserted with effect from assessment year 2007-08 and the date of their applicability has been specified, these cannot have any retrospective effect. We observe that this judgment in the case of Virtual Soft Systems Ltd. ( supra ) came up for consideration before the Hon ble Supreme Court in the later case of CIT v. Raman Lal C. Hathi [2008] 117 Taxman 479, in which case again the question for consideration was the applicability of Explanation 4 to section 271(1)( c ) from retrospective or prospective date. After considering the decision in the case of Virtual Soft Systems Ltd. ( supra ) it was felt that the matter needed reconsideration. Hence it was placed for the appropriate direction before the Hon ble Chief Justice of India. We further note that in pursuance to that, the Hon ble Supreme Court recently in a Larger Bench considered this aspect in CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308 . After taking note of the various judgments on the issue of retrospective or prospective applicability of any provision, the earlier jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses its significance. It takes retrospective effect from the date when the substantive provision was inserted. So the relevant consideration for addressing to this issue is to understand the true nature of the amendment. If the new insertion or the amendment has the effect of imposing a new liability then it is substantive in nature and ordinarily applies prospectively. If, however it is either procedural or clarificatory in the nature, then it would be retrospective notwithstanding the fact that a particular date has been mentioned from which it would be applicable to. Such clarificatory or procedural amendment would be fully applicable in the time anterior to the date from which it has been said to be applicable. So the ultimate test for considering the retrospective or prospective operation of an amendment is to consider its nature rather than going by the date from which it has been stated to be applicable from. 18.7 As can be seen that section 14A was inserted with a view to clarify the intention of making disallowance in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act . It can be viewed fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reducing its rigor, which stipulates that no reassessment under section 147 or rectification under section 154 shall be carried out by the Assessing Officer so as to give effect to the newly inserted provision. This has been done so as not to disturb the proceedings which have already attained the finality in the period prior to this insertion. However, the assessments which are pending at any stage, may be before the Assessing Officer or Commissioner (Appeals) or Tribunal or the higher Courts, would be governed by the mandate of this section as it is retroactive. The Special Bench of the Tribunal in Aquarius Travels (P.) Ltd. v. ITO [2008] 111 ITD 53 (Delhi) has also held that the proviso to section 14A merely restrains the Assessing Officer from invoking the provisions of sections 147 and 154 only in relation to completed assessments for assessment year 2001-02 and the earlier years; proviso does not talk of restricting the power of CIT(A) or the Tribunal and, therefore, CIT(A) and the Tribunal are empowered to apply the provisions of section 14A in the appeals pending before them for the assessment year 2001-02 and earlier years even if section 14A had not been invoked by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure as relatable to the exempt income. In his opinion only the direct expenditure calls for disallowance. Still further the onus was stated to be on the Assessing Officer to establish the nexus of the such expenditure with the exempt income. If the Assessing Officer fails to conclusively prove nexus between the direct expenditure and the exempt income, the ld. AR submitted, the provisions of section 14A will fail and no disallowance will be warranted. 20. In the opposition, the learned D.R. contended that the expression in relation to is wide in its scope and amplitude. In his opinion any expenditure having direct or indirect relation with the exempt income would call for disallowance under this section. He relied on the judgment of the Hon ble Supreme Court in the case of Doypack Systems (P.) Ltd. ( supra ). 21. From the above submissions made by the erudite AR, it is noted that he has put across essentially the following three points for our consideration under this segment of the issue : I.Section 14A talks of the relation between the expenditure and the exempt income. II.Unless there is a direct and proximate connection between the exempt income and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is not allowable under section 14A as is relatable to the exempt income and not in considering all the expenses one by one for ascertaining if either of them have resulted into exempt income and thereafter considering such amount as disallowable under section 14A. If this way of interpretation of section 14A as suggested by the ld. AR is accepted, then the method of computing the expenditure as relatable to the exempt income as provided in rule 8D, would become meaningless and the words in accordance with such method as may be prescribed in sub-section (2) for determining the amount disallowable would require obliteration, which in our considered opinion is not possible. We, therefore, reject this contention raised on behalf of the assessee. II. Unless there is a direct and proximate connection between the exempt income and the expenditure, section 14A will not apply 23.1 The next point urged on behalf of the assessee is that unless there is a direct and proximate connection between the expenditure and the exempt income, there cannot be any disallowance of the expenditure under this section This view point is based on the meaning given by the ld. AR to the expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f different varieties of cloth and yarn. As per section 3 of this Act every textile undertakings and the right, title and interest of the company in relation to every such textile undertaking shall, virtue of this Act, vest in the Central Government, section 4 provides that "the textile undertaking referred to in section 3 shall be deemed to include all assets, rights, leaseholds, power, authorities and privileges and all property movable and immovable including lands, buildings, workshops, stores, instruments, machinery and.....". Section 7 provides that the shares were to be issued by the National Textile Corporation for the value of the assets transferred to it by the Central Government. Swadeshi Cotton Mills had 10 lakh shares in Swadeshi Polytex Limited and 17,18,344 shares in Swadeshi Mining and Manufacturing Co. Ltd. It was claimed on behalf of these companies that such type of assets would not vest with the Government for acquisition. The Hon ble Supreme Court noted that section 3 employs expression "in relation to". Interpreting this expression, the Hon ble Court held that it was a very broad expression which presupposes another subject-matter as these are words of compreh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pression relating to was interpreted by the Hon ble Supreme Court did not have any relation, worth the name, insofar provisions like section 14A concerning with the disallowance of expenditure relatable to the exempt income, are concerned. What to talk of that Act as homogeneous to the Income-tax Act, it has no matching shades at all. Moreover, in this judgment the Hon ble Supreme Court was dealing with the scope of the expression "relating to". However, in the case of Doypack Systems (P.) Ltd. ( supra ) the question for consideration was to determine whether the shares etc. held by the Swadeshi Cotton Mills would vest in the Central Government or not. The Hon ble Supreme Court observed that in section 3 of the Swadeshi Cotton Mills Co. Ltd. (Acquisition and Transfer of Undertakings) Act, 1986 the phrase used was "in relation to". Giving meaning to this expression, it was held as under : "The expression in relation to (so also pertaining to ), is a very broad expression which presupposes another subject-matter. These are words of comprehensiveness which might have both a direct significance as well as an indirect significance depending on the context. Assuming that the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred in relation to such income which does not form part of the total income" to mean the amount as determined by the Assessing Officer in accordance with such method as may be prescribed . The method has been prescribed in rule 8D to mean both direct and indirect expenditure as discussed elsewhere in this order. Since the Legislature opted to field the expression in relation to in preference over directly relatable to or wholly and exclusively for the purposes of , it clarified its intention of giving wider meaning and bringing into sweep not only the direct but also the indirect expenditure in relation to the exempt income for the purposes of disallowance under section 14A. The position becomes more clear when we look into the direction of rule 8D, which has been brought in pursuance to sub-section (2) of section 14A. Here it would be interesting to jot down rule 8D, which runs as under : "8D. Method for determining amount of expenditure in relation to income not includible in total income. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with ( a )the correctness of the claim of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ategorized as expenditure incurred in relation to exempt income. We do not have even an iota of doubt in our mind that the intention behind using the expression in relation to in section 14A is to encompass not only the direct but also the indirect expenditure which has any relation to the exempt income. We, therefore, held that all the direct and indirect expenses are disallowable under section 14A, which have any relation with the income not chargeable to tax under the Act. 23.8 Be that as it may, we would also deal with the contention that there should be a dominant and immediate connection between the expenditure incurred and the exempt income so as to make disallowance under section 14A. A great deal of emphasis has been laid on the establishing of dominant and immediate connection between the expenditure incurred and the exempt income. According to the ld. AR the expenditure of interest on investment in shares has direct and proximate link with the profit or loss from trading of shares and indirect link with the dividend income which was earned incidentally and hence no disallowance is warranted. In our opinion there is a basis fallacy in this argument. Dominant and imm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le computing the business income and hence these cannot again be deducted from the dividend income for the purposes of computing deduction under section 80M. Based on this judgment, the learned A.R. bolstered his point of view that no disallowance is permissible in respect of interest and other expenditure under section 14A. We are not in agreement with the contention raised on behalf of the assessee primarily for the reason that the judgment of Hon ble Bombay High Court has been rendered in the context of compu- tation of deduction under section 80M. The question was whether gross or net dividend should be considered for computing deduction under this section. Nowhere section 14A was the subject-matter of consideration. Whereas section 80M talks of granting deduction from the gross total income, section 14A, which operates in an entirely different field, concerns itself with making disallowance of the expenditure incurred in relation to the exempt income . In this view of the matter, we are of the considered opinion that the judgments rendered in the context of section 80M cannot be applied when the question is of making disallowance under section 14A. 23.11 We further do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see for bringing a particular amount of expenditure in the purview of section 14A and the manner of computation of disallowance has ceased to be of any relevance since the Assessing Officer is bound to adopt rule 8D for making disallowance under section 14A, where he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. III. Section 14A has no application on the incidental exempt income 24. Now we turn to examine the main plank of the submissions made on behalf of the assessee with a lot of vehemence that it is of paramount importance to see the intention with which the expenditure was incurred and if it is incurred with a view to earn a taxable income then no disallowance under section 14A is possible even in respect of the exempt income resulting incidentally. The reason for this proposition is advanced to be the presence of the dominant or immediate connection between the expenditure incurred and taxable income. To put it simply it was submitted that if the dominant object of the expenditure is to earn taxable income, being the profit on sale of shares in the present case, then no disallowance would be made with reference to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf of the assessee that the interpretation sought to be given by the learned D.R. to section 14A, if accepted would be very harsh and unequitable as it will result in disallowance of expenditure which is indirectly related to the exempt income. We are again at loss to appreciate this contention for the simple reason that the duty of the Tribunal is to interpret the provision as it exists in the Act. The Tribunal cannot usurp the Legislative power to tone down the rigor of any provision. It is settled legal position that equity or hardship is hardly any relevant ground for the interpretation of tax law. Our view is supported by the judgment of the Hon ble Supreme Court in the case of Karamchari Union v. Union of India [2000] 243 ITR 143 in which it was pleaded that the receipts on account of CCA, HRA and DA be not charged under the head Salaries . It was also submitted that it would be of immense hardship if CCA is put to tax. Rejecting this contention, the Hon ble Supreme Court held that the receipt on account of CCA, HRA and DA are in the nature of income and are chargeable to tax as profits in lieu of salary. It was further laid down that equity is no consideration while in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne the expenditure in relation to incidental exempt income from the operation of section 14A. There is no exception for not considering any income which is exempt from tax, be it the main or incidental. We, therefore, jettison this argument. 26. In view of the foregoing discussion we hold that the provisions of section 14A of the Act are applicable with respect of dividend income earned by the assessee engaged in the business of dealing with shares and securities, on the shares held as stock-in-trade when earning of such dividend income is incidental to the trading in shares. We, therefore, answer the question posed to us in affirmative. As we have held that sub-sections (2) and (3) of section 14A are retrospective in nature and the resultant rule 8D would also fall on the same line, then the disallowance under section 14A is required to be computed with reference to the mandate of these provisions. We, therefore, set aside the impugned orders in all the cases before us and remit the matter to the file of the Assessing Officers for computing the disallowance in terms of section 14A read with rule 8D. 27. We want to make it clear that all the cases relied on by both the side ..... 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