TMI Blog2015 (9) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... n framed is required to be answered in favour of the Assessee and against the Revenue. The Court answers the question framed by holding that the expression “does not form part of the total income” in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Consequently, the impugned order of the ITAT is set aside and the appeal is allowed in the above terms - Decided in favour of assessee. - ITA 749/2014 - - - Dated:- 2-9-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr Ajay Vohra, Senior Advocate with Ms. Kavita Jha and Mr. Vaibhav Kulkarni, Advocate For the Respondent : Ms Suruchi Aggarwal, Senior Standing Counsel with Ms. Lakshmi Gurung, Advocate ORDER 1. This is an appeal filed by the Assessee under Section 260A of the Income Tax Act, 1961 ( Act ) against the order dated 4th January, 2013 passed by the Income Tax Appellate Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly ₹ 2,13,38,698 over the previous year has been made in the shares of Max India Ltd. It is also seen that the investments in other investment companies to the extent of ₹ 4,61,155 is shown under the sub-head unquoted-trade-long term . This figure has remained unchanged over the previous year. In the computation filed for the purposes of the income tax return, the details of investments have been shown in two broad categories of capital assets and trading assets and the investment in Max India Limited is under the head trading assets with the investments in the investment companies shown under the head of capital assets . 8. The AO appears to have proportionately disallowed, for the purposes of Section 14A of the Act, the interest attributable to the long term investment (other than trade) for the purposes of earning exempted income. Since the unsecured loan borrowed for the purpose was ₹ 6,88,70,000 the disallowance of the amount under Section 14 A of the Act was calculated thus: 1,21,03,367 x 6,88,70,000 = ₹ 97,87,570 ----------------------------------- 8,51,65,000 9. The CIT (A) by an order dated 27th September 2007 upheld the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed. Now since dividend is exempt, as a consequence thereof expenditure has to be disallowed. 11. The Special Bench of the ITAT negatived the submission of the Appellant that the language of both Sections 57 (iii) and Section 14A of the Act were materially different. The Appellant's further contention and that since the decision in Rajendra Prasad Moody (supra) was only in the context of purchase of shares in which case a deduction of expenses can be claimed under Section 57(iii) of the Act whereas in the present case the Assessee was entitled to deduction of expenses under Section 36(1)(iii) of the Act and, therefore, Section 14A cannot be applied, was also rejected. 12. The matter was then placed before the regular Bench of the ITAT which passed the impugned order on 4th January 2013 remanding the matter to the file of the AO for reconsideration of the issue afresh. The ITAT referred to the decision of this Court in Maxopp Investment Ltd. v. Commissioner of Income-tax, New Delhi (2012) 347 ITR 272 (Del). 13. At the hearing of this case on 6th July 2015, the Court had asked the parties to also address the issue of whether the interest paid on borrowings for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 (Guj.) and the third of the Allahabad High Court in Commissioner of Income Tax, Kanpur v. Shivam Motors (P) Ltd. (decision dated 5th May 2014 in ITA No. 88/2014). These three decisions reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question corresponding expenditure could not be worked out for disallowance. 16. In CIT v. Holcim India (P) Ltd. (supra), the Court further explained as under: 15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. 21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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