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TMI Blog2012 (12) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... e throughout the year and there was opening debit balance and even on closing of the year there was a debit balance. On a query it was mainly submitted that with M/s Jai Durga Paper Mills Pvt Ltd. assessee has business dealings and the assessee has in fact made purchases of Rs. 5.40 crores and even sales have been made at Rs. 3.10 crores. Therefore, these were business transactions and interest could not be disallowed. However, the Assessing Officer did not agree with the submissions and he worked out the debit balance on various dates and disallowed the interest by following the decision in case of CIT V. Abhishek Industries, 286 ITR 1 (PH). The disallowance was worked out at Rs. 6,19,626/-. 3. Before the ld. CIT(A) the submissions made before the Assessing Officer were reiterated. The ld. CIT(A) agreed with the submissions and deleted the addition. 4. Before us, the ld. DR for the revenue strongly supported the order of Assessing Officer. He also referred to page 7 of the order where the Assessing Officer has found that the assessee had advanced the money on 9.4.2007 and debit balance kept on increasing till the middle of July 2007. This clearly shows that the assessee has di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.A. Builders has held that in case there is commercial expediency in advancing the money then no disallowance of interest can be made u/s 36(1)(iii) of the Act. The under-mentioned judgments relied upon by the A.R also support the case of the appellant: i. Accelerated Freeze Drying Co. Ltd. V. DCIT (2008) 5 DTR 285 ii. Munjal Salesa Corporation V. CIT & Anr (2008) 3 DTR (S.C) 217 iii. M/s Kashmiri Lal Bharat Bhushan (2005) 26 IT Rep 152 (Asr-Trib) iv. CIT V. Rockman Cycle Industries Ltd. v. CIT V. Premier Poly Sacks Pvt Ltd (2010) 321 ITR 450 The above clearly shows that with M/s Jai Durga Paper Mills Pvt Ltd. the assessee had made regular business dealings and the amounts going into debit are on account of sales when the assessee was doing business with the sister concern then it is natural that some time account may be in debit. In these circumstances we are of the opinion that the ratio of the decision in case of CIT V. Abhishek Industries (supra) is not applicable. Accordingly we find nothing wrong with the order of the ld. CIT(A) and confirm the same. 7. Ground No. 2 - After hearing both the parties we find that during assessment proceedings the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of section 10(33). Income from mutual funds stands on the same basis ; (iii) The provisions of sub-sections (2) and "(3) of section 14A of the Income-tax Act 1961 are constitutionally valid ; (iv) The provisions of rule 8D of the Income-tax Rules as inserted by the Income-tax (Fifth Amendment) Rules, 2008, are not ultra vires the provisions of section 14A, more particularly sub-section (2) and do not offend article 14 of the Constitution ; (v) The provisions of rule 8D of the Income-tax Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09 ; (vi) Even prior to the assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer has to enforce the provisions of subsection (1) of section 14A. For that purpose, the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is again the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. 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 bythe 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 April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent Assessment Year." 15. In f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Rajasthan High Court in Shekhavati General Traders Ltd. vs. Commissioner of Income Tax (1987) 167 ITR116 and the judgment of this Court in Income Tax Appeal No. 530 of 2006 (The Punjab State Cooperative Milk Producer's Federation Ltd, vs. Commissioner of Income Tax-if and another) decided on 28,3,2011 and of the Apex Court in Commissioner of income Tax vs. Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR Judgments 233. 12. Controverting the aforesaid submission, learned counsel for the assessee relied upon the decision of the Calcutta High Court in Commissioner of Income Tax vs. United Collieries Ltd. (1993) 203 ITR 857 (Calcutta). Learned counsel also relied upon Commissioner of Income Tax vs. Central Bank of India (2003) 264 ITR 522 (Bombay) and State Bank of Indore vs. Commissioner of Income Tax (2005) 275 ITR 23 (MP). It was contended that it was only the actual expense incurred for earning dividend which was to be deducted from the dividend income for calculating the admissible deductions under Section 80M of the Act. It was urged that the plea of the Revenue that proportional expenses should also be reduced, was against the statute. 13. We have giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax the net income, i.e., gross income minus the expenditure. Oh the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of Section 14A. In Section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within Section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of Section 14A. 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 head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:- A X B C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total asset as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous yea ..... 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