TMI Blog2007 (10) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... e hands of the company if such dividend is exempted in the hands of the shareholders. If the assessee earned income which is not includible in the total income, in that case the expenditure could be disallowed u/s14A because it speaks of expenditure incurred by the assessee in relation to income which does not form part of the total income. In other words assessee has earned income which forms part of the total income. Reading of section 14A makes it clear that while computing the income under Chapter IV deduction will not be allowed with regard to expenditure incurred by the assessee in relation to an income which does not form part of the total income under the Income-tax Act. The decision relied by the learned DR in the case of Everplus Securities Finance Ltd.[ 2006 (3) TMI 229 - ITAT DELHI-H] , the case does not support the view canvassed by the learned DR. This was the case wherein actually dividend income was earned. The question was in such a situation if the interest bearing fund invested in shares which yielded dividend income Assessing Officer can disallow interest paid on such loans by invoking section 14A. In the instant case of the assessee the admitted positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. Assessee credited interest of Rs. 1,67,000 from M/s. IFCCPL as loan. Assessee was asked, when there was no income from investment and if any income accrues at all as dividend which is exempt from income, then why not the disallowance of interest of loan acquiring such investment be made under section 14A. Assessee submitted that assessee has not claimed any income exempted. Hence, 14A could not be applied. It was submitted that for the year under consideration assessee was showing a loss of Rs. 13,22,494 mainly due to interest payment on loans taken. Assessee has taken additional loan of Rs. 47,00,000 to meet the first call of Rs. 50,00,000 made by the company in which assessee has already invested an amount to the tune of Rs. 10,00,000. Since the company in which the assessee invested the amount has incurred loss, assessee has not received any dividend. Consequently assessee has only a loss. It was further submitted that during the year under review assessee paid interest to the tune of Rs. 16,35,493 but assessee limited its loss to Rs. 13,22,494 by making money by way of earning interest and some income by profit on sale of investment/shares. 3.2 Assessing Officer notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to investment shares. Further, the fact that income from such investments does not form part of the total income of the recipient also cannot be disputed. 3.4 Further, if strict liberal construction leads to an absurd result i.e., result not intended to the sub-served, by object of the legislation ascertained from the scheme of the legislation, then, if another construction is possible apart from strict liberal construction, then that construction should be preferred to the strict construction. In case, if it is taken that no interest can be disallowed as assessee has not earned any income which is not includible in the total income of the assessee, this interpretation can lead to absurd result, in the sense if assessee has been in receipt of even Rs. 100 of dividend income, the entire interest would be disallowable as expenditure related to income which does not form part of the total income. In other words, the interest would be allowable in the hands of assessee who is not in receipt of dividend income and interest would be disallowed in the hands of assessee who is in receipt of dividend income, however, paltry it might be. Thus the interpretation which would create unf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was submitted before the CIT(A) that the Assessing Officer failed to appreciate that expenditure incurred by the assessee cannot be disallowed under section 14A of the Income-tax Act, 1961 as the assessee has no income which does not form part of the total income during the year under consideration. Assessee relied upon the decision of the Tribunal s Mumbai Bench in the case of Jt. CIT v. Holland Equipment Co. B.V. [2005] 3 SOT 810 wherein the Tribunal held that no disallowance can be made under section 14A if there is no income which is not to be included in the total income of the assessee. In this the Tribunal held that section 14A applies only when some or any part of the income is to be included in the total income and the expenditure relating to that part of the accepted income can be disallowed and not otherwise. Assessee has also relied upon the decision of the Tribunal in the case of V.C. Nannapaneni v. Asstt. CIT [2005] 94 ITD 309 (Hyd.) wherein it was held that section 14A of the Act applies only when income received or receivable does not form part of the total taxable income. It was submitted that for the year under consideration the assessee is not having any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of total income is to be found out from section 5. The total income of any previous year of a person, who is a resident, includes all income from whatever sources derived. Hence the counsel submitted that as far as assessee is concerned no taxable income/dividend accrued for the year under consideration. None of the clause of section 5 has been satisfied as far as assessee is concerned. The learned counsel further submitted that no income deemed to be received so as to attract section 7. No income deemed to be accrued or arose to the assessee in India within the scope of section 9. In short, Counsel submitted that none of the following sections, i.e., section 5, 6, 7, 8 or 9 apply to the case of the assessee. Counsel submitted that as far as assessee is concerned section 5 will apply but subject to section 10( 33 ) as it stood prior to omission of clause (33) with effect from 1-1-2003. Chapter III mentions income which do not form part of total income. 6. Counsel further submitted that section 14A deals with expenditure of certain income which are not includible in the total income of the assessee. In such a case wherein income is not includible in the total income and if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, 1961. Under the facts and circumstances of the matter, she ought not have upheld the said disallowance of Rs. 4,12,57,221. 2.The learned CIT(A) erred in upholding the disallowance of Rs. 60,220 being the administrative other expenses under section 14A of the Act. Under the facts and circumstances of the matter she ought not to have upheld the said disallowance of Rs. 60,220." 10. After discussing the issue in detail the Tribunal found that the assessee was having income exempted under section 10( 33 ) of the Income-tax Act and also some other income, i.e., it expended certain amount being interest paid on such borrowings for the purpose of investment in shares, dividend from which was exempted under section 10( 33 ) of the Income-tax Act and also certain other investments in foreign companies, dividend of which was not governed by the provisions of section 115-O and hence it was not exempted under section 10( 33 ). The Tribunal remanded the matter back to the file of Assessing Officer to find out the extent of investment and expenditure and to allow exempted part and to disallow the non-exempted part. In view of the above the counsel submitted that only i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Hearing the rival submissions I am of the view that the order of the revenue authorities is liable to be reversed. 15. Section 14A inserted by the Finance Act, 2001 provided that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The scope and effect of the provision is explained by the Board in Circular No. 14/01, dated 12-12-2001. Board found that there have been cases where deduction have been claimed in respect of certain incomes which are not includible while computing the total income as they were exempted under various provisions of the Act. This in effect means that the tax incentives given by way of exemptions to certain categories of income were being used to reduce the tax payable on the non-exempted income by debiting the expenditure incurred to earn the exempted income against the taxable income. So as to prevent this practice section 14A was introduced. By virtue of this section now no deduction should be allowed in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from 1-4-1962 onwards the Assessing Officer shall not reassess the case under section 147 or pass an order enhancing the assessment or reduce a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year beginning on or before 1-4-2001. Reading of section 14A makes it clear that while computing the income under Chapter IV deduction will not be allowed with regard to expenditure incurred by the assessee in relation to an income which does not form part of the total income under the Income-tax Act. In other words, expenditure incurred by the assessee in relation to income which forms part of the total income for the year under consideration only can be disallowed. Otherwise the wording does not form part of the total income becomes otiose . Income is computed for each year. Income should form part of the total taxable income under consideration so as to get taxed and not otherwise. 21. Tribunal s Mumbai Bench, in the case of Holland Equipment Co. BV ( supra ) held as under : "Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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