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TMI Blog2015 (2) TMI 895X X X X Extracts X X X X X X X X Extracts X X X X ..... vacated and the order of the A.O. be restored. 2. The solitary issue involved in this appeal is with regard to the disallowance under section 14A of the Income-tax Act, 1961 (hereinafter called in short "the Act"). 3. The facts in brief borne out from the record are that the assesseecompany has total investment of Rs. 6153.61 lakhs as on 31.3.2009. It earned dividend income during the year amounting to Rs. 4,771/- on the investments aggregating to Rs. 4.10 lakhs only. The dividend income was claimed as exempted income under section 10(33) of the Act. According to the assessee, no direct expenses were incurred during the year. The Assessing Officer has invoked the provisions of section 14A of the Act and having applied rule 8D of the rules, estimated the disallowance of Rs. 29,51,820/- i.e. 0.5% of the aggregate investment. 4. The assessee preferred an appeal before the ld. CIT(A) with the submission that there was no direct expenses to earn this dividend income. It was further contended that the total expenses debited to the profit and loss account amounted to Rs. 4,48,259/- only, which had been claimed as business expenses and computed the total income for the year under refere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Centre (supra), in which we have taken a view that in the light of the judgment of the Hon'ble Apex Court in the case of Rajendra Prasad Moody (supra), the disallowance under section 14A of the Act can be made even if there is no receipt of any dividend income. The relevant observations of the Tribunal are extracted hereunder:- 37. We have considered the rival submissions. We find that in this year, the issue was decided by the ld. CIT(A) as per Paras 13 to 17 of his order and for the sake of ready reference, the same are reproduced herein below:- "13. I have considered the facts and circumstances of the case, the reasons noted by AO for disallowance and the arguments of the appellant. It is seen from the facts that the appellant has invested in the shares of the sister concerns companies to the extent of Rs. 7,97,64,380/- in total over past years and Rs. 3,38,88,530/- in the current year. The AO has noted that this investment cannot be said to have been made for the business purpose. The AO has also noted that the investment in shares is not the business activity of the appellant as per its objectives. During the year the appellant has paid interest on the public deposits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d sufficient profits. The copies of the balance sheet and profit & loss account filed for the relevant years shows that the appellant had a net profit of Rs. 34,14,292.31 in the year ended 31st March, 1995, Rs. 45,23,870.87 in the year ended 31st March, 1996, Rs. 11,73,112.84 in the year ended 31st March, 1997, Rs. 79,47,875.0^in the year ended 31st March, 2000 and Rs. 43,05,224.11 in the year ended 31st March, 2003. Thereby, the appellant has stated that there is no nexus between the borrowings and invested funds. Contrarily, it has been reiterated that the investment had been made out of profit of earlier years. The AO has also noted only Rs. 3,38,88,530/- invested during the current year where as the balance amount of Rs. 4,58,75,850/- relates to earlier years. Considering the facts that the appellant had business profit in the earlier years and a part of the investment is made in the earlier years, I am unable to find a nexus between the borrowed capital and amount invested in the earlier years. Accordingly, the finding of the AO that the interest bearing fund was directed for investment is not proved. The decision in the case of CIT vs. Gopi Krishna 47 ITR had laid the correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xus between the investment made by appellant in the shares of a sister concerns and the interest bearing funds borrowed by the appellant. Therefore, the disallowance made by AO to the extent of Rs. 56,64,137/- is not justified. Accordingly, Ground No. 1(x) of appeal is allowed. 17. Grounds No. 2 and 3 of appeal are general and vague. No specific submissions and arguments have been made on these grounds. Hence same are treated as dismissed." 38. From the above paras from the order of CIT(A), we find that the addition was deleted by him on the basis that the Assessing Officer has not appreciated the business connection with the sister concern and commercial expediency as argued by the assessee in respect of these transactions of investment. He has noted in Para 13 of his order that deduction was claimed by the assessee u/s 36 (1) (iii) of the I. T. Act. Thereafter it is noted by CIT(A) in para 14 of his order that it cannot be said that the amounts invested by assessee are for non business purpose, though same may be indirect business connection. We are of the considered opinion that having business connection is different thing and making investment for business expediency is diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this court in Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, 4 (SC), where interpreting the corresponding provision in s. 12(2) of the Indian I.T. Act, 1922, which was ipsissima verba in the same terms as s. 57(iii). Bose J., speaking on behalf of the court, observed : "It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned." It is indeed difficult to see how, after this observation of the court, there can be any scope for controversy in regard to the interpretation of s. 57(iii). It is also interesting to note that, according to the revenue, the expenditure would disqualify for deduction only if no income results from such expenditure in a particular assessment year, but if there is some income, howsoever small or meagre, the expenditure would be eligible for deduction. This means that in a case where the expenditure is Rs. 1,000, if there is income of even Re. 1, the expenditure would be deductible and there would be resulting loss of Rs. 999 under the head " I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or or not is required to be seen only if expenditure is otherwise allowable under a provision of the Act minus section 14A. In fact, section 14A is a disallowing section, as per which, even if deduction is allowable in respect of any expenditure as per some provision of the Act then in view of the provision of section 14A of the Act, deduction cannot be allowed of such expenditure if it is found that such expenditure is incurred in relation to income which does not form part of the total income under this Act. Hence, it has to be first established by the assessee that deduction on account of interest is allowable under some provisions of the Act. In our considered opinion, in the facts of the present case, interest is not an allowable expenditure under any provision of the Act. It is definitely not allowable for computing salary income or income from house property. It cannot be said that deduction on account of interest expenditure is to be allowed for computing income from capital gain since income on account of capital gain is taxable because deduction on account of interest expenditure is not allowable for computing capital gain. For computing capital Gain, deduction is allowab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was held by Hon'ble Apex Court that section 57(iii) does not suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. As per the same logic, when the interest expenditure is incurred for earning dividend income, it has to be accepted that this interest expenditure was incurred in relation to earning exempt dividend income and hence, it is not relevant as to whether there was actual dividend income in the present year or not. In this regard, we are aware that there are Tribunal decisions as well as the judgment of Hon'ble Allahabad High Court also that if there is no dividend income actually earned then no disallowance can be made u/s 14A but in these judgments, the judgment of Hon'ble Apex Court rendered in the case of Rajendra Prasad Moody (supra) was not brought to the notice of the tribunal and Hon'ble High Court and hence, it was not taken note of. It was also not taken note of that even if it is held that no disallowance is to be made u/s 14A of the Act, then also, there has to be a positive finding that under which section, this interest expenditure is allowable. Since dividend income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at any point of time, own fund was available with the assessee firm for making investment in shares. The fund is available with the assessee out of unsecured loans and sundry creditors. The assessee is paying interest on unsecured loan and for sundry creditors, the assessee is getting supply of materials without payment and the assessee does not get cash from sundry creditors for making investment in shares and therefore, it cannot be accepted that the investment was made out of fund available in the form of sundry creditors. 43. As per above discussion, we have seen that interest expenditure incurred by the assessee by borrowing funds for making investment in shares is not allowable from assessment year 2004-05 because the dividend income is not taxable income under the head income from other sources and therefore, deduction is not allowable u/s 57(iii) of the Act. We have also seen that no deduction is allowable u/s 36 (1) (iii) also. Hence we reverse the order of learned CIT (A) and restore that of the A.O. Regarding various judgments cited by the learned AR of the assessee including the judgment of Hon'ble apex court rendered in the case of S. A. Builders (Supra), we would lik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not form part of the total income under this Act in accordance with such method as may be prescribed, 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 this Act. 3(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. RULE 8D OF THE RULES: "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 the previous year, is not satisfied with- (a) the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Assessing Officer to adopt different formula to compute the amount of expenditures incurred in relation to such income which does not form part of the total income under the Act. Only two options are left with the Assessing Officer - one is to accept the expenditures claimed by the assessee and if he disputes the same, he has to compute the expenditures by adopting the formula laid down in rule 8D of the Rules. 9. Turning to the facts of the case, the assessee has earned the dividend income at Rs. 68,635/- for which it has claimed expenditures of only Rs. 16,544/- of which details were furnished before the Assessing Officer. Apparently, the quantum of expenditures does not commensurate with the exempted income claimed by the assessee. Therefore, the Assessing Officer has every reason to doubt the correctness of the expenditures claimed by the assessee for earning the exempted income of Rs. 17,68,735/-. Therefore, we are of the view that the Assessing Officer has to re-compute the expenditures relating to the dividend income which does not form part of total income under this Act and for computing the expenditures, the Assessing Officer has no other option but to adopt the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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