TMI Blog2011 (11) TMI 267X X X X Extracts X X X X X X X X Extracts X X X X ..... and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment. - ITA 687/2009, 112/2010, 263/2010, 805/2009, 853/2009, 856/2009, 958/2009, 1060/2009, 1096/2009, 936/2009 and 416/2010 - - - Dated:- 18-11-2011 - Badar Durrez Ahmed, Siddharth Mridul, JJ. Ajay Vohra with Kavita Jha, Akanksha Aggarwal and Amit Sachdeva for the Appellant Sanjeev Sabharwal with P.L. Bansal, Sonia Mathur, Sanjeev Sabharwal with Utpal Saha for the Respondent/Revenue JUDGMENT Badar Durrez Ahmed, J 1. This is a batch of twenty one (21) appeals under section 260A of the Income Tax Act, 1961. Eleven (11) of these have been filed by assessees and ten (10) by the revenue. Eight of these appeals - four by assessees and four by the revenue - have been admitted and questions have been frame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrol over its group companies, primarily Max India Ltd. As per the assessee, any profit resulting on the sale of shares held as trading assets was duly offered to tax as business income of the assessee. During the previous year relevant to the assessment year 2002-03, the assessee incurred total interest expenditure of Rs.1,61,21,168/-, which was claimed as business expenditure under section 36 (1) (iii) of the Income Tax Act, 1961 (hereinafter referred to as "the said act"). According to the assessee, the expenditure claimed was not hit by section 14A of the said act, on the ground that although borrowed funds were partly utilised for investment in shares held as trading assets, such investment was made with the intention to acquire and retain a controlling interest in the aforesaid company and that the receipt of dividend thereon was merely incidental. 4. In respect of the said assessment year 2002-03, the assessee had filed a return of income declaring an income of Rs.78,90,430/-. The assessee had received the following incomes:- 1. Interest on loans advanced Rs.1,94,70,181 2. Dividend received Rs.49,90,860 3. Profit on sale of shares Rs.1,49,285 The afores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under this Chapter, 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 this Act." 7. By virtue of the Finance Act, 2002, the following proviso was inserted in section 14A and was deemed to have been inserted with effect from 11/05/2001:- "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 on or before the 1st day of April, 2001." 8. As a result of the insertion of the said proviso, Section 14A was as follows:- "Expenditure incurred in relation to income not includible in total income. 14A. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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 on or before the 1st day of April, 2001." 11. By Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes (CBDT), in exercise of its powers under section 295 of the said Act read with sub-section (2) of section 14A of the said Act, made the "Income-tax (Fifth Amendment) Rules, 2008" to further amend the said Rules (i.e., the Income-tax Rules, 1962) by introducing Rule 8D therein. Clause 1(2) of the Income-tax (Fifth Amendment) Rules, 2008 clearly stipulated that the rules would come into force from the date of publication in the Official Gazette. The said Rule 8D is as under:- "Method for determining amount of expenditure in relation to income not includible in total income. 8D.(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 made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t activity was not deductible. The Supreme Court repelled this contention in the following manner:- "This contention proceeds on the basis that only expenditure incurred in respect of a business activity giving rise to income, profit or gains taxable under the Act can be given deduction to and not otherwise. We see no basis for this contention. To find out whether the deduction claimed is permissible under the Act or not, all that we have to do is to examine the relevant provisions of the Act. Equitable considerations are wholly out of place in construing the provisions of a taxing statute. We have to take the provisions of the statute as they stand. If the amount claimed is permissible under the Act then the same has to be deducted from the gross profit. If it is not permissible under the Act, it has to be rejected. As mentioned earlier, it is not disputed that the cultivation of sugar-cane and the manufacture of sugar constituted one single and indivisible business. Section 10(2) says that profits under section 10(1) in respect of a business should be computed after deducting the allowances mentioned therein. One of the allowances allowed is that mentioned in section 10(2)(xv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the 'exempt' income or income not exigible to tax, was not allowable as a deduction. Objective behind insertion of section 14A 15. The object behind the insertion of section 14A in the said Act is apparent from the Memorandum explaining the provisions of the Finance Bill 2001 which is to the following effect:- "Certain incomes are not includable 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 nonexempt 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 expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.." (Emphasis supplied) 17. The Supreme Court also clearly held that in the case of an income like dividend income which does not form part of the total income, any expenditure/deduction relatable to such (exempt or non-taxable) income, even if it is of the nature specified in sections 15 to 59 of the said Act, cannot be allowed against any other income which is includable in the total income. The exact words used by the Supreme Court are as under:- "Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection with: it does not mean merely having a reference to." 20. According to Mr Vohra, the expression "in relation to" appearing in section 14A of the said Act has to be considered in similar light. He submitted that the expenditure incurred must have a dominant and immediate connection with the exempt income. Thus, according to him, since the shares were acquired for the purpose of acquiring and retaining control of the operating company, the expenditure in respect of such acquisition of shares would not have a dominant and immediate connection with the dividend income, which was merely incidental. As such, Mr Vohra submitted, the expenditure could not be disallowed under section 14 A of the said act. 21. There are several difficulties with the argument advanced by Mr Vohra. The first of them is that in Madhavrao Scindia (supra) the Supreme Court was concerned with the interpretation of a constitutional provision dealing with the jurisdiction of courts, inter alia, concerning any dispute in respect of any right accruing under or any liability or obligation arising out of any of the provisions of the Constitution relating to a treaty, agreement, covenant, engagement, sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as an indirect significance depending on the context..." "... In this connection reference may be made to 76 Corpus Juris Secundum at pages 620 and 621 where it is stated that the term "relate" is also defined as meaning to bring into association or connection with. It has been clearly mentioned that " relating to" has been held to be equivalent to or synonymous with as to "concerning with" and "pertaining to". The expression "pertaining to" is an expression of expansion and not of contraction." (emphasis supplied) 23. Mr Vohra also placed reliance on Navin Chemicals Manufacturing and Trading Co Ltd v. Collector of Customs: 1993 (68) the LT 3 (SC). In the said decision the controversy was with regard to the meaning to be given to the expression "determination of any question having a relation to the rate of duty of customs or to the value of goods for the purposes of assessment". The Supreme Court was of the view that the key was to be found in the words "for purposes of assessment". It held that where the appeal involved the determination of any question which had a relation to the rate of customs duty for the purposes of assessment, that appeal must be heard by a S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act cannot be ascribed a narrow or constricted meaning. If we were to accept the submission made on behalf of the assessees then sub-section (1) would have to be read as follows:- "For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee with the main object of earning income which does not form part of the total income under this Act." That is certainly not the purport of the said provision. The expression "in relation to" does not have any embedded object. It simply means "in connection with" or "pertaining to". If the expenditure in question has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the said Act. In Walfort (supra), the Supreme Court made it very clear that the permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the heads of income and is chargeable to tax. The Supreme Court further clarified that if an income like dividend income is not part of the total income, the expenditure/de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. 31. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f all the assessment years prior to the assessment year beginning on or before the 1st day of April, 2001, concluded assessments could not be disturbed despite the fact that Section 14A had been expressly made retrospective with effect from 01.04.1962. The provisions of Section 14A, which were retrospective with effect from 01.04.1962 are now encapsulated in sub-section (1) of Section 14A. It is also clear that sub-sections (2) and (3) of Section 14A were introduced subsequently by virtue of the Finance Act, 2006 and were introduced with effect from 01.04.2007. However, although sub-sections (2) and (3) had been introduced with effect from 01.04.2007, they remained empty shells inasmuch as the expression "such method as may be prescribed" got meaning only by the introduction of Rule 8D by virtue of the Income-tax (Fifth Amendment) Rules, 2008 which was notified by the Central Board of Direct Taxes by its notification No.45/2008 dated 24/03/2008. 33. Dr Rakesh Gupta, the learned counsel, who had appeared for some of the assessees, submitted that Section 295 of the said Act empowered the Central Board of Direct Taxes to make rules for the whole or any part of India for carrying o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein it has, inter alia, been held that the provisions of Rule 8D of the said Rules has prospective effect and shall apply with effect from assessment year 2008-09 onwards. 36. Insofar as sub-sections (2) and (3) of Section 14A are concerned, they have also been introduced by virtue of the Finance Act, 2006 with effect from 01.04.2007. This is apparent, first of all, from the Notes on Clauses of the Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139-140]. The said Notes on Clauses refers to clause 7 of the Bill which had sought to amend Section 14A of the said Act. It is specifically mentioned in the said Notes on Clauses that:- "This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years." 37. Furthermore, in the Memorandum explaining the provisions in the Finance Bill, 2006 [281 ITR (ST) at pages 281-281], it is once again stated with reference to clause 7 which pertains to the amendment to Section 14A of the said Act that:- "This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method. 42. Thus, the fact that we have held that sub-sections (2) and (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort (supra) to the following effect:- "The theory of apportionment of expenditure between taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2001-02 687/2009 Maxopp Investment Ltd v. CIT 2002-03 856/2009 Cheminvest Ltd v. CIT 2002-03 805/2009 Eicher Ltd v. CIT 2002-03 936/2009 Eicher Ltd v. CIT 2001-02 112/2009 Eicher Goodearth Ltd v. CIT 2004-05 263/2010 Mohair Investments Ltd v. CIT 2002-03 416/2010 Medicare Investments Ltd v. CIT 2002-03 958/2009 Minda Industries Ltd v. CIT 2002-03 1096/2009 Jagatjit Industries Ltd v. CIT 2004-05 In all these appeals, the Income Tax Appellate Tribunal had, after upholding the disallowance under section 14A of the said Act, restored the matters to the respective files of the concerned Assessing Officers with the direction to re-compute the said disallowance in accordance with Rule 8D of the said Rules. However, since we have held that Rule 8D would be inapplicable to the assessment years prior to 2008-2009, the assessing officers would now have to follow the steps outlined in paragraph 42 above. Revenue's appeals 46. The appeals filed by the revenue are disposed of as below:- I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14A of the said Act by apportioning the administrative expenses in respect of exempt income. In both cases, the Tribunal's judgment and order, to the extent it deleted the disallowance under section 14A, is set aside and the matter is restored to the file of the assessing officer who is to follow the steps outlined in paragraph 42 above. ITA No.389/2009 [CIT v. Sharda Motors Industries Ltd](AY 2004-05) ITA No.1114/2009 [CIT v. Sharda Motors Industries Ltd](AY 2005-06) The Tribunal had, inter alia, deleted the disallowance made by the Assessing Officer under section 14A of the said Act being the proportionate expenditure incurred in relation to earning dividend income. In both cases, the Tribunal's judgment and order, to the extent it deleted the disallowance under section 14A, is set aside and the matter is restored to the file of the assessing officer who is to follow the steps outlined in paragraph 42 above. ITA No.217/2009 [CIT v. AKM Systems Pvt Ltd](AY 2001-02) The assessee company received dividend of Rs 81,87,432/- in respect of the assessment year 2001-02. The Assessing Officer invoked the provisions of section 14A of the said Act and disallowed the enti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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