TMI Blog2015 (11) TMI 277X X X X Extracts X X X X X X X X Extracts X X X X ..... i (Hereinafter called the CIT(A) ) for the assessment year 2008- 09. The Revenue has raised following grounds of appeal in the memo of appeal filed:- 1.0 On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made under section 14A r.w. 115JB disregarding the provisions of section 115JB(2) r.w. Explanation-1 r.w. clause of which requires any expenditure in relation to the exempt income also to be taken into consideration while computing the book profit under section 115JB. 2. The brief facts of the case are that the assessee company is engaged in the business of manufacturing of S.S. Billets, Angles, Flat Bars, Channels, S.S.Wire Rods etc. . During the year under consideration, the assessee company derived income of ₹ 28,19,03,964/- from Business Profession after claiming deduction of ₹ 1,20,36,43,184/- u/s 10B and ₹ 67,03,000/- u/s 80G of the Income Tax Act,1961(Hereinafter called the Act ). 3. During the course of the assessment proceedings, the assessing officer (hereinafter called the AO ) noticed that the assessee company has investments in equity shares of various companies totaling to &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act by holding that the phrase income which does not form part of total income used in Section 14A of the Act is not limited to the cases where some income has actually been received and it will also apply to cases, where income is not included in the total income, whether received or not by relying on the decision of Hon'ble Delhi Tribunal in Aquarius Travels Pvt. Ltd. v. ITO (2008) 21 (II) ITCL 521 (Del-Trib.) and also relying on the decision of Delhi Tribunal In Cheminvest Ltd. v. ITO (2009) 121 ITD 318 that whenever any expenditure is incurred in relation to income which does not form part of total income, it has to suffer disallowance irrespective whether any income is earned or not. The CIT(A) held that the assessee company has claimed interest expenditure and it has not been able to demonstrate that the investment has been made solely out of cash flows generated from operations by way of profit, it cannot claim that no interest on borrowings is disallowable. Thus, the CIT(A) confirmed the action of the AO in computing disallowance u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962, as mandated by the statute from the assessment year 2008-09 and onwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. The term book profit has been defined as the net profit as per Profit and Loss Account as adjusted in accordance with the statutory additions and statutory deductions as provided. The CIT(A) held that the AO cannot go beyond the net profit as shown in the Profit and Loss Account except to the extent provided in the explanation to Section 115JB of the Act and hence the CIT(A) held that the AO while computing Book Profit u/s 115JB of the Act cannot make disallowance u/s 14A of the Act as such disallowances are not covered by the exceptions as provided in the explanation to Section115JB of the Act. 6. Aggrieved by the orders of the CIT(A), the Revenue is in appeal before us with respect to the orders of the CIT(A) deleting the additions of ₹ 73,07,018/- made u/s 14A read with Section 115JB of the Act disregarding the provisions of Section 115JB(2) read with explanation 1 read with clause f of which requires any expenditure in relation to the exempt income also to be taken into consideration while computing the book profit u/s 115JB(2) of the Act. 7. The Ld. DR relied upon the orders of the AO and submitted that the explanation 1(f) to Section 115JB(2) of the Act pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... astructure Limited v. Addl. CIT to contend that no addition can be made to book profit computed u/s 115JB of the Act except as provided under explanation 1 to Section 115JB(2) of the Act. The assessee company reiterated its submissions as made before the authorities below and submitted that that disallowance u/s 14A of the Act cannot be added while computing the book profit u/s 115JB of the Act as the provisions of Section14A of the Act are limited for the purpose of computation of income under Chapter IV of the Act and the same cannot be extended to the MAT provisions u/s 115JB of the Act which is a self contained code. The assessee company also submitted that no exempt income has been earned during the assessment year. The asssessee company submitted that no expenditure has been incurred by the assessee company in relation to exempt income. The assessee company submitted that since no amount has been debited to the Profit and Loss Account as referred to in clause (f) to Explanation (1) to Section 115JB(2) of the Act, the disallowance made by the AO by invoking the provision of Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 amounting to ₹ 73,07,018/-, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956): Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. Explanation [1].-For the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the total income under this Act.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which 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) 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.] Perusal of Section 14A of the Act provides that it mandates disallowance of expenditure in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting normal taxable income which is upheld by the CIT(A) in the first appeal and the same amount of expenditure of ₹ 73,07,018/- is added to compute book profit u/s 115JB of the Act which is computed u/s 14A of the Act read with Rule 8D of Income Tax Rules,1962.Our view is fortified by the following decisions: 1. ITO v. RBK Share Broking Pvt. Ltd. (2013) 37 taxmann.com 128(Mum. Trib.) 2. CIT v. JSW Energy Ltd. (2015) 60 taxmann.com 303(Bom.HC) 3. Dabur India Ltd. v. ACIT (2013) 37 taxmann.com 289(Mum. Trib.) 4. Godrej Consumer Products Limited v. Addl. CIT (2014) 48 taxmann.com 293 (Mum.Trib.) The assessee company has relied upon on the decision of Mumbai Tribunal in Reliance Industrial Infrastructure Ltd. v. Addl. CIT in ITA No 69 70/ Mum/2009 whereby the Mumbai Tribunal held that reasonable disallowance it to be made u/s 14A of the Act and Section 14A of the Act cannot be imported into clause (f) of the explanation 1 to Section 115JB of the Act to make disallowance u/s 115JB of the Act as the said appeal pertains to the assessment year 2005-06 and 2006-07 which are prior to assessment year 2008-09, while the instant case under appeal pertains to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company for tax under the Explanation to section 115J of the Income Tax Act. The relevant part of section 115J of the Income Tax Act reads as follows: 115J. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1-4-1988 but before the 1-4- 1991 (hereafter in this section referred to as the relevant previous year ), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). Explanation.- For the purposes of this section, 'book profit' means the net profit as s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to in clauses (i) and (ii) attributable to the business, the profits from which are eligible for deduction under section 80HHC or section 80HHD ; so, however, that such amounts are computed in the manner specified in sub-section (3) or subsection (3A) of section 80HHC or sub-section (3) of section 80HHD, as the case may be ; or (iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956 (1 of 1956), are applicable. (2) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A or sub-section (3) of section 80J. 5. For deciding this issue, it is necessary for us to examine the object of introducing section 115J in the Income Tax Act which can be easily d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the revenue that it is still open to the assessing officer to rescrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the revenue on sub-section (1A) of section 115J of the Income Tax Act in support of the above contention is misplaced. Sub-section (1A) of section 115J does not empower the assessing officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the Income Tax Act for the limited purpose of making the said account so maintained as a basis for computing the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 1 to Section 115JB(2) of the Act permit the Book profit to be increased with the expenditure relatable to any income to which Section 10 (other than Section 10(38) of the Act), Section 11 or Section12 of the Act applies and hence the above decision in Apollo Tyres Limited in 255 ITR 273(SC) is not applicable to the facts of the case. The assessee company has relied upon the decision of Hon'ble Supreme Court in HCL Connect Systems and Services Limited 305 ITR 409(SC). Infact this judgment of Hon'ble Supreme Court instead of advancing the case of the assessee company support the proposition adopted by us that adjustment to book profit as per explanation 1 to Section 115JB(2) of the Act is permitted . The relevant extracts of the judgment of Hon'ble Supreme Court in HCL Connect Systems and Services Limited (supra) is as under: 5. For deciding this issue, it is necessary for us to examine the object of introducing section 115J in the Income Tax Act which can be easily deduced from the Budget Speech of the then Finance Minister of India made in Parliament while introducing the said section which is as follows CIT v. Appollo Tyres Ltd. (supra): It is only fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the revenue that it is still open to the assessing officer to rescrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the revenue on sub-section (1A) of section 115J of the Income Tax Act in support of the above contention is misplaced. Sub-section (1A) of section 115J does not empower the assessing officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the Income Tax Act for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income-tax. Beyond that, we do not think that the said subsection empowers the authority under the Income Tax Act to probe into the accounts accepted by the authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued circular no 5/2014 dated 11-2-2014 that even in case of absence of exempt income, Section 14A disallowance shall be made in case the asssessee has made investments which are capable of yielding exempt income even though there might not be an actual receipt of exempt income . The afore-stated circular is reproduced here under: SECTION 14A OF THE INCOME-TAX ACT, 1961, READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 - EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME -CLARIFICATION ON DISALLOWANCE OF EXPENSES UNDER SECTION 14A IN CASES WHERE CORRESPONDING EXEMPT INCOME HAS NOT BEEN EARNED DURING THE FINANCIAL YEAR CIRCULAR NO.5/2014 [F.NO.225/182/2013-ITA.II], DATED 11-2-2014 Section 14A of the Income-tax Act, 1961 ['Act'] provides for disallowance of expenditure in relation to income not includible in total income. 2. A controversy has arisen in certain cases as to whether disallowance can be made by invoking section 14A of the Act even in those cases where no income has been earned by an assessee which has been claimed as exempt during the financial year. 3. The matter has been examined in the Board. It is pertinent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formula, namely:- A*B/C Where .. 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; (iii) an amount equal to one-half percent 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 year. (Emphasis added) 6. Thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. 7. This may be brought to the notice of all concerned. We are also guided by the decision of Special Bench, Delhi Tribunal in the case of Cheminvest Limited (2009) 121 ITD 318(SB) which has held as under: 17. We have heard the parties and considered the rival submissions. In the present case there is no dispute that intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) 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. 21. The allowance of expenditure in relation to dividend income would thus be not admissible in computing the income of an assessee under this Act. It would again be so in both the situations i.e., whether the shares are held as investment as held in Harish Krishnakant Bhatt's case (supra) of Ahmedabad Bench of the Tribunal, as als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of deduction in section 57(iii) and the language of the said section is materially different from the language of section 14A of the Act and secondly, that the aforesaid decision was rendered in the context of purchase of shares held as investment', in which case deduction of expenses is claimed under section 57(iii), whereas in the present case the assessee is undisputedly entitled to deduction of expenses under section 36(1)(iii) of the Act and, therefore, section 14A cannot be applied in the case of a person engaged in the business of dealing in shares claiming deduction under section 36(1)(iii) of the Act, has no force. Though it is true that language of section 57 for allowance of expenditure and the language of section 14A for disallowance of such expenditure are different but it is not so material in deciding the issue. Whereas section 57 allows the expenditure incurred for making or earning the income, section 14A disallows the expenditure in relation to income which does not form part of total income'. The term expenditure in relation to' is wider in scope and provides for disallowance if it related to income not forming part of total income. 24. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f making or earning such income', held that in order to claim deduction under the aforesaid section 57(iii) of the Act, it is not necessary that income should have actually been earned or made. The actual earning or receipt of income on parity of reasoning would also not be a condition for disallowance of such interest under the provisions of section 14A of the Act which employs the expression in relation to income which does not form part of the total income'. The ratio of the decision can be used in the converse situation also to hold that even if no income were received, expenditure incurred can be disallowed under section 14A of the Act. The expenditure incurred by way of interest on acquisition of shares is, in the case of the assessee, is allowable deduction in terms of section 36(1)(iii)/37(1) of the Act as the expenditure by way of interest incurred for purposes of business', a term wider than for making or earning income' as held by the Supreme Court in the case ofMalayalam Plantations Ltd. (supra). At page 150 it says:- The aforesaid discussion leads to the following result: The expression for the purpose of the business' is wider in scope th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include the income from dividend as specie because of its absence. A thing which is absent cannot exist in and consequently does not form part of anything. 29. We may refer to the object of introducing the provision of this inserted section 14A by the Finance Act, 2001, with retrospective effect from 1-4-1962 as clarified in the provisions as well as in the memorandum explaining the provisions, notes on clauses relating to the Finance Bill, 2001 and in the Board's Circular No. 14 of 2001, dated 22-11-2001 and Circular No. 8 of 2002, dated 27-8-2002 in the following way:- Certain incomes are not includible 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 non-exempt 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 expenditure, is taxed. On t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not relatable to the earning of taxable income. This is what is provided by the Legislature in the scheme of the Income-tax Act even without the existence of section 14A of the Act with retrospective effect from 1-4-1962. 32. It is true that the Supreme Court held in Maharastra Sugar Mills Ltd.'s case (supra) that the fact that the income is exempt is not a relevant circumstance and in the case of Rajasthan State Warehousing Corpn.'s case (supra) that if there is one indivisible business, the entire expenditure is allowable under section 36(1)(iii) of the Act but these decisions were rendered prior to the introduction of section 14A by the Finance Act, 2001, with retrospective effect and, therefore, they would have no application after introduction of section 14A where the expenditure is not to be allowed if it related to income not included in the total income of the assessee. Similarly, the decisions in the cases of Malyalam Plantation (supra), Birla Cotton Spinning Weaving Mills Ltd. (supra), Madhav Prasad Jatia (supra) and S.A. Builders Ltd. (supra) had no application in view of the introduction of section 14A in the statute in cases where the expenditure relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has held that the propositions laid down in Rajendra Prasad Moody's case (supra) for allowability under section 57(iii) are equally applicable for deductions claimed under section 36(1)(iii) or section 37. Thus this argument of the Revenue is without any merit. 33. In further appeal preferred by the revenue against the aforesaid order of the Tribunal, the High Court dismissed the question raised, by observing as under:- Revenue is in appeal on the following questions:- Whether on the facts and in the circumstances of the case and in Law the Hon'ble Tribunal was right in deleting the disallowance made by the Assessing Officer of interest paid by the assessee-company on borrowed funds amounting to ₹ 241.10 lakhs overlooking the fact that the borrowed funds were used by the assessee- company to invest in the capital of another partnership firm and since profits derived by the assessee-company from a partnership firm were exempt from tax under section 10(2A) of the Income-tax Act, the interest expense related to such tax free profits is to be disallowed under section 14A of the Income-tax Act? .......................... Insofar as question (A) is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence that flows is that expenses claimed by the assessee are deductible in full under the head profit and gains from business or profession It has been similarly held in the cases of Shree Shyamkamal Finance Leasing Co. (P.) Ltd. v. ITO [2008] 21 SOT 42 (Mum.) (SMC) and V.C. Nannapeni (supra). These are the cases before rendering of Special Bench decision in the Daga's case and the expenditure was held to be allowable under section 36(1)(iii) and not because of absence of exempt income. In any case that view is not in consonance with the clear language of section 14A as discussed above. 36. Delhi Bench of the Tribunal in the case of Insaallah Investment Ltd. (supra) held that the receipt of dividend in the relevant year is irrelevant which is by following the decision of the Special Bench of the Tribunal in the case of Aquarius Travel (P.) Ltd. (supra). In this case of Aquarius Travel (P.) Ltd. (supra) the issue whether the provisions of section 14A can be invoked in the appellate proceedings for the first time or not was held in affirmative. 37. We are conscious of the decision of Sun Engg. (P.) Ltd. (supra), for the proposition that it is not permissible to pick ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the disallowance is to be considered. In other words, the starting point for applying section 14A is to consider the amount of expenditure and then moving forward for examining if it had resulted in the exempt income or not. This is exactly what the assessee is contending in this case though in different phraseology that there must be exempted income earned to disallow the expenditure. It was rightly rejected, by stating: We are not convinced with the view point of the learned A.R. that section 14A speaks about making disallowance of expenditure which has resulted into exempt income. The language of sub-section (1) of section 14A clearly provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not from part of the total income under this Act . On going through the simple and plain language, it is abundantly clear that the relation has to be seen between the exempt income and the expenditure incurred in relation to it and not vice versa. What is relevant is to work out the expenditure in relation to the exempt income and not to examine whether the expenditure incurred by the assessee has resulted into exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of no income earned or received. In the context of later position it be read as exempted income/no income resulted' as the expenditure that is allowed or disallowed is for making or earning income or for the purposes of business or in relation to such income. If read in this way there would be no confusion in understanding the order of the Special Bench. 43. What one has to see is whether any expenditure were incurred by an assessee in relation to an income that does not form part of total income of the assessee under this Act, and if the answer is in affirmative then that expenditure cannot be allowed irrespective of the fact that it was allowable under different provisions of the Act where a different phraseology is used in allowing that expenditure as the focus has to on disallowance within parameters of section 14A, an overriding provision over allowance provisions. It would result in disallowance even of no income has resulted or made or earned by the assessee in the year under consideration. We also make it clear that the disallowance has to be of the entire, amount of the expenditure so related and, as claimed in revenue's appeal, cannot be reduced by the rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of amount of ₹ 10/- from the sale of the remains of the said destroyed crop, the entire expenditure of ₹ 100/- towards agricultural activities shall stand dis-allowed u/s 14A of the Act because there is agriculture income of meagre sum of ₹ 10/- while in the first case the agricultural income being NIL, the entire expenditure of ₹ 100/- towards agricultural activity stand allowed, this defies all logic because the rationale of Section 14A of the Act is specified by Hon'ble Apex Court In CIT v. Walfort Shares Stock Brokers Private Limited (2010) 192 Taxman 211(SC) as under:- 17. The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction 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 against the taxable income (see Circular No. 14 of 2001, dated 22-11-2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words expenditure incurred in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37). Every pay-out is not entitled to allowances for deduction. These allowances are admissible to qualified deductions. These deductions are for debits in the real sense. A pay-back does not constitute an expenditure incurred in terms of section 14A. Even applying the principles of accountancy, a pay-back in the strict sense does not constitute an expenditure as it does not impact the Profit and Loss Account. Pay-back or return of investment will impact the balance-sheet whereas return on investment will impact the Profit and Loss Account. Cost of acquisition of an asset impacts the balance sheet. Return of investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s appeal, the extracts from the said judgment are as under: 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 ₹ 1,000, if there is income of even Re. 1, the expenditure would be deductible and there would be resulting loss of ₹ 999 under the head Income from other sources . But if there is no income, then, on the argument of the revenue, the expenditure would have to be ignored as it would not be liable to be deducted. This would indeed be a strange and highly anomalous result and it is difficult to believe that the legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It ..... X X X X Extracts X X X X X X X X Extracts X X X X
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