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DCIT, Central Circle-18 & 19, Mumbai Versus Viraj Profiles Limited.

2015 (11) TMI 277 - ITAT MUMBAI

Addition made under section 14A r.w. 115JB - MAT computation - CIT(A) deleted the addition - whether 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? - Held that:- No infirmity with the orders of the AO and we hold that the AO has rightly disallowed the expenditure of ₹ 73,07,018/- by invoking the provisions of Section .....

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ioner of Income Tax (Appeals)-39, Mumbai (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 .....

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ax 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 ₹ 51,03,59,701/- as on 31-03-2008. The assessee company was asked to explain as to why disallowance u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 should not be invoked in respect of the exempt income. In respon .....

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lied upon the decision of Special Bench, ITAT, Mumbai in ITA NO 8057/Mum/03 dated 20.10.2008 in the case of M/s Daga Capital Management Private Limited and held that both direct and indirect expenses are disallowable u/s 14A of the Act which have any relation with the income not chargeable to tax under Act. The AO also relied upon the decision of Hon'ble Bombay High Court in Godrej & Boyce Manufacturing Company Limited v. DCIT (ITA No. 626 of 2010 & WP no. 758 of 2010(Bom.)) and made .....

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by the assessment orders of the AO, the assessee company carried the matter in appeal before the CIT(A) and contended that no disallowance u/s 14A of the Act can be made by the AO as the assessee company has not earned any exempt income during the relevant assessment year. The assessee also submitted that only direct expenditure incurred for earning the exempt income will be hit by Section 14A of the Act and in the case of the assessee company, there are no specific borrowings for investment an .....

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ecision 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 demo .....

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Tax Rules, 1962. With Respect to the re-computation of the book profit u/s 115JB of the Act by the AO by adding the sum of ₹ 73,07,018/- disallowed u/s 14A of the Act, the assessee company submitted before the CIT(A) 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 pro .....

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by invoking the provision of Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 amounting to ₹ 73,07,018/- cannot be increased for the purpose of arriving at the book profit. The assessee company relied upon the following judgments: a) Apollo Tyres Limited v. CIT 255 ITR 273(SC) b) CIT v. HCL Connect Systems and Services Limited 305 ITR 409 (SC) c) ACIT v. Spray Engineering devices Limited (2012) 53 SOT 70 (Chd. Trib.) 5. The CIT(A) allowed the appeal of the assessee compa .....

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en reiterated by Hon'ble Bombay High Court in Kinetic Motor Co. Ltd. v. DCIT wherein it has been held that there is no scope for the AO to make adjustment to Book Profits beyond what was authorized by the definition in Explanation1 to Section 115J of the 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 pro .....

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ditions 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 provides for disallowance of the expenditure relatab .....

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ed that for disallowance of expenditure under clause (f) to explanation1 to section 115JB(2) of the Act with respect to income which does not form part of income as provided u/s 10 (except Section 10(38) or Section11 or Section 12 of the Act, it is not necessary that there is any exempt income actually earned or received by the assessee company. The assessee company having made investment in shares to the tune of ₹ 51,03,59,701/- as on 31-03-2008, the said investment is capable of producin .....

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k profit u/s 115JB (2) of the Act. The Ld. DR relied upon the following decisions to contend that the disallowance made u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 can be added to compute Book profits u/s 115JB(2) of the Act and relied upon 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 Consum .....

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(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 .....

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to ₹ 73,07,018/-, the profit as per profit and loss account cannot be increased for the purpose of arriving at the book profit. The assessee company relied upon the following judgments: a) Apollo Tyres Limited v. CIT 255 ITR 273(SC) b) CIT v. HCL Connect Systems and Services Limited 305 ITR 409 (SC) c) ACIT v. Spray Engineering devices Limited (2012) 53 SOT 70 (Chd. Trib.) 9. We have considered the rival contentions, material on records and case laws relied upon by the parties. We have ob .....

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ct, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, [2012], is less than [eighteen and one-half per cent] of its book profit, [such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of [eighteen an .....

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are its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company:] Provided that while preparing the annual accounts including profit and loss account,- (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 be the same as have been adopted for the purpose of preparing such accounts .....

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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 a .....

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(j) is not credited to the profit and loss account, and as reduced by,-]]] ……. …….." We have observed that Section 115JB of the Act starts with non-obstante clause Notwithstanding anything contained in any other provision in this act…" meaning thereby that the Section 115JB shall be applicable notwithstanding any thing contained in any other provision of the Act and shall have over-riding effect upon other provisions of the Act. The Section 115JB stip .....

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ed by item Nos. (a) to (k) of the said Explanation 1 to Section 115JB of the Act if they are debited to the Profit and Loss Account and from such profit item Nos. (i) to (viii) of the Explanation are to be reduced. The figure arrived at after the above exercise is the book profit of the assessee for the relevant previous years. The explanation 1 clause (f) to Section 115JB(2) of the Act stipulate that amount of expenditure relatable to any exempt income, other than Section 10(38) of the Act, is .....

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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 .....

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54, 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 relation' to the income which does not form part of the total income under the Act while clause (f) in explanation1 to Section 115JB (2) of the Act mandates disallowance of expenditure relatable' to the income to which Section 10 (other than Section 10(38) of the Act) or Section 11 or Section 12 of the Act applies .....

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he Act mandates that if the AO is not satisfied with the correctness of the claim of the assessee with regard to the expenditure incurred by the assessee in relation to the income which does not form part of the total income, then disallowance shall be computed in accordance with the prescribed method. Rule 8D of Income Tax Rules, 1962 prescribes the method for computing disallowance of expenditure in relation to earning of exempt income . The said Rule 8D of Income Tax Act,1961 is a machinery p .....

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assume that the amount computed under Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 shall have no reference to the amount debited to the Profit and Loss Account and there can not be any disallowance u/s 14A of the Act unless the expenditure is debited to Profit and Loss Account and hence disallowance u/s 14A is always a part of expenditure debited to the Profit and Loss Account. In the instant case under appeal, the AO has disallowed the expenditure of ₹ 73,07,018 comp .....

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15) 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) .....

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o note that decision in Reliance Industrial Infrastructure Limited (supra) is a prior decision than the decisions rendered by Mumbai Tribunal in ITO v. RBK Share Broking Pvt. Ltd (supra), Godrej Consumer Products Limited v. Addl. CIT (supra) and Dabur India Ltd v. ACIT (supra). Similarly, the assessee company has relied upon the decision of Appolo Tyres Limited 255 ITR 273 (SC) and in the above decision, the Apex Court has held as under: "3. The brief facts necessary for the disposal of fir .....

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computed the said profit and loss account of the company so as to exclude the provision made for arrears of depreciation. The said action of the assessing officer in questioning the correctness of the accounts maintained by the company was challenged by the company before the Income Tax Appellate Tribunal (hereinafter referred to as "the Tribunal") which among other things held that the assessing officer has no authority to reopen the accounts of a company which is certified by the aud .....

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finds that the accounts of the company are not in accordance with the provisions of the Companies Act, he could make the necessary changes before proceeding to assess 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 busin .....

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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 shown in the profit and loss account for the relevant previous year prepared under sub-section (1A), as increased by (a) the amount of in .....

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expenditure relatable to any income to which any of the provisions of Chapter III applies ; or (g) the amount withdrawn from the reserve account under section 80HHD, where it has been utilised for any purpose other than those referred to in sub-section (4) of that section ; or (h) the amount credited to the reserve account under section 80HHD, to the extent that amount has not been utilised within the period specified in subsection (4) of that section; (ha) the amount deemed to be the profits un .....

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e relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1-4- 1988, shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation ; or (i) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the pr .....

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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 unde .....

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which is as follows CIT v. Appollo Tyres Ltd. (supra): "It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called 'zero-tax' highly profitable companies deserves attention. In 1983, a new section 80VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will to have to pay a 'minimum corporate ta .....

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their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that section 115J was introduced in the Income Tax Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent of its book profits as shown in its own account. For the said purpose, section 115J makes the income reflected in the company's books of account the deemed income for the purpose of assessing the tax. If we .....

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ons of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by the statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before 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 t .....

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ction 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 .....

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ose of the Companies Act and another for the purpose of income-tax both maintained under the same Act. If the Legislature intended the assessing officer to reassess the company's income, then it would have stated in section 115J that "income of the company as accepted by the assessing officer". In the absence of the same and on the language of section 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the .....

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not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J." The Hon'ble Supreme Court in above decision has held that the AO cannot tinker with the profit and loss prepared by the assessee company in accordance with the Provisions of The Companies Act,1956 and which are certified by the statutory auditors and approved by the Company in Annual General Meeting and scrutinised by the Registrar .....

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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 propositio .....

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the said section which is as follows CIT v. Appollo Tyres Ltd. (supra): "It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called 'zero-tax' highly profitable companies deserves attention. In 1983, a new section 80VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will to have to pay a 'min .....

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es were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that section 115J was introduced in the Income Tax Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent of its book profits as shown in its own account. For the said purpose, section 115J makes the income reflected in the company's books of account the deemed income for the purpose of assessi .....

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ce to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by the statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before 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. .....

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ection (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 t .....

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one for the purpose of the Companies Act and another for the purpose of income-tax both maintained under the same Act. If the Legislature intended the assessing officer to reassess the company's income, then it would have stated in section 115J that "income of the company as accepted by the assessing officer". In the absence of the same and on the language of section 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the .....

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ing officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J." The assessee company has also relied upon the decision of Chandigarh Tribunal in the case of ACIT v. Spray Engineering Devices Limited (2012) 53 SOT 70(Chd.) whereby it was held that the AO has limited power to tinker with the Profit and Loss prepared as per Companies Act,1956 to the extent of explanation to section 11 .....

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ind that this argument of the assessee company in view of the following reasons: 1. The Revenue has issued 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 .....

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as 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 mention that section 14A of the Act was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A with retrospective effect since inception of .....

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he 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 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". Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses whi .....

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ance to be triggered. Also, section 14A of the Act does not use the word "income of the year" but "income under the Act". This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. 5. The above position is further substantiated by a language used in Rule 8D(2)(ii) & 8D(2)(iii) of I.T. Rules which are extracted below: "(ii) in a case where t .....

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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 p .....

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or trading as well as investment purposes. The interest in either case is allowable, in the former case under section 36(1)(iii) and in the later case under section 57 of the Act. 18. If any income were exempt from tax because it is not included in the total income by virtue of section 10, section 14A prohibits allowance of any expenditure incurred in relation thereto. Income from deployment of funds in shares earned by way of dividend is not included in total income by virtue of the provisions .....

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ng anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distribu .....

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hich does not form part 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 th .....

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he 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 also not disputed by the assessee; or they are held on .....

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e, no disallowance can be made by invoking the provisions of section 14A of the Act. We do not find any force in this contention of the assessee. When the expenditure of interest is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not. Section 14A does not envisage any such exception. This is even if the interest paid on borrowings for the purchase of share were allo .....

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income, we cannot import any such condition when it comes for disallowance of the same expenditure under section 14A of the Act. This is what is held by the Ahmedabad Bench of the Tribunal in the case of Harish Krishnakant Bhatt (supra) when it of observed that interest on monies borrowed for purchase of shares held as investment is not allowable whether or not there is any yield of dividend. It is so held by applying the decision of the Supreme Court in Rajendra Prasad Moody's case (supra) .....

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t 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 .....

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rming part of total income. 24. The second aspect of the argument also has no force as the provisions of section 14A are controlling the computation of income and other provisions of the Act and has the supervening effect over other provisions. Therefore, even if the expenditure were allowable under any provision of the Act, it has to suffer the disallowance because of the overriding effect of section 14A of the Act, be that section 36(1)(iii) or section 57 of the Act. 25. While considering the .....

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t purpose must be making or earning of income, section 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 section 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 lang .....

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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 section 57(iii)." 26. It is true that the Court, while considering the expression for the purpose of making or earning such income', held that in order to claim deduction under .....

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ceived, 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 .....

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ness'. Irrespective of the fact that the expenditure incurred by way of interest is an allowable deduction in terms of the aforesaid sections of the Act which introduces a caveat of section 14A providing to disallow expenditure which is otherwise allowable in the circumstances mentioned in that section(s). The Legislature, using the expression expenditure in relation to income which does not form part of the total income' in section 14A of the Act, in no way indicates that it does not en .....

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part of total income' in section 14A excludes a case of no earning or non receipt of income from its ambit. When there is no income, it cannot form part of anything and certainly it does not, in any case form part of total income. In a contrast, to put it differently, can one say does it form part of total income', the answer is No. The words "does not" of course, denotes the present situation, and not the future events as apprehended by the ld. Counsel to have been contemplate .....

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does not 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 .....

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e 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 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 In .....

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owed. The another way to consider the issue is that if interest is allowable, it would be allowable against dividend income and the net dividend income after allowing that, alone would be excluded from total income under section 10(4). Section 14A was inserted to clarify this intention of the Legislature to set the existing controversy on this issue at rest. 31. In the present case, we find that the borrowed money has been utilized in purchase of shares held both as investment as well as stock-i .....

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interest incurred is to be relatable to earning of dividend on the shares purchased. The dividend income is now exempted from tax by virtue of section 10(34) of the Act and, therefore, as a consequence thereof, the interest paid on borrowed capital utilized in purchase of shares, being the expenditure incurred in relation to dividend income not forming part of assessee's total income, cannot be allowed as a deduction. There is no chargeable income against which it can be allowed as a deduct .....

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e 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. S .....

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ad made investment in a partnership firm, income from which was exempt from tax under section 10(2A) of the Act. Since investment in the partnership firm was made by the assessee out of borrowed funds, in the assessment orders for the assessment years 2001-02 and 2002-03, the Assessing Officer disallowed interest expenditure claimed by the assessee under section 14A holding that since income derived from the partnership firm would be exempt under section 10(2A) of the Act, the expenditure relata .....

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isions of section 14A of the Act. The observations of the Tribunal read as under:- "For the assessment year 2001-02 the assessee had in fact earned interest of ₹ 99,01,000 and the Assessing Officer has brought it to tax. The first appellate authority has rightly held that this receipt is taxable under the head Profits and gains of business or profession' under section 28(v) of the Act. There is no exemption claimed under section 10(2A) of the Act by the assessee. Section 10(14) cl .....

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udgment of the Hon'ble Apex Court in the case of Rajendra Prasad Moody (supra) is not applicable to this case, we find that the Hon'ble Madras High Court in the case of M. Ethurajan (supra) 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 preferre .....

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y 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 concerned, on facts we find that there is no profit for the relevant assessment year. Hence the question as framed .....

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me earned by the assessee which does not form part of the total income under the Act." Under these circumstances we do not see any reason why the claim of the assessee was not allowable under section 36(1)(iii). This case does not help the assessee at all as it was not a case of no income at all but a case income chargeable to tax under section 28(iv) of the Act and expenditure was in relation thereto. 35. It has been similarly held by the Mumbai Bench of the Tribunal in the case of Asstt. .....

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incurred expenditure in relation to income which is exempt under section 10(33) of the Act as it then existed. The assessee has not earned any dividend income. The only income is interest on fixed deposits with the bank. As against this income, the assessee had claimed expenditure of ₹ 2,69,85,000. Thus, it is seen that in the year in question there is no income of the assessee which is exempt under section 10(33) of the Act. Relying on the decision by the Mumbai Bench of the Tribunal in t .....

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e & 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 .....

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entence in a decision totally out of its context and the Supreme Court in the case of Padmasundara Rao (Decd.) v. State of Tamil Nadu [2002] 255 ITR 147 at p. 153 observing that the Courts should not place reliance on the decision without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. 38.It may not correct to state that the decision of the Aquarius Travels was decided on the basis of the concession of the counsel and the is .....

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quantification of interest for the period 1-6-1997 to 31-3-1998 in respect of borrowings utilized for investment in shares and held the same to be disallowed. It was however a case of investment in shares and not stock-in-trade but that as we have held earlier is not material for disallowing interest to borrowing utilized in purchase of shares. 40. To support his contention that there must be exempt income to invoke section 14A Mr. Vohra referred to the Special Bench of the Tribunal in assessee& .....

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ere because exempt income was there in consideration and that is why the Special Bench used this language. It should be read as a reference of the source of exempt income whether received or not. 41. The contention of the assessee before the Special Bench was that the Bench had to view the items of expenditure first and if these have resulted in exempt income, only then the disallowance is to be considered. In other words, the starting point for applying section 14A is to consider the amount of .....

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ection 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 .....

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to such exempt income. It is clearly borne out from, rule 8D as has been discussed infra that it has three clauses of sub-rule (2), being the expenditure directly relating to the exempt income as per clause (i); expenditure by way of interest which is not directly attributable to particular income as per-clause (ii) and; an amount equal to one half per cent of the average of the value of investment as per clause (iii). The sum total of these three amounts is the amount disallowable under section .....

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ure as relatable to the exempt income as provided in rule 8D, would become meaningless and the words in accordance with such method as may be prescribed' in sub-section (2) for determining the amount disallowable would require obliteration, which in our considered opinion is not possible'..... We have already repelled the contention raised on behalf of the assessee that the object of the expenditure is to be viewed as a determinative factor for making any disallowance under this section. .....

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rned 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 as .....

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. 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 receipt of interest which has no relation to such expenditure. 44. An attempt was made by the assessee to show the overreaching effect of rule 8D and wanted to raise an additional ground but we did not allow him to address on these issues because of the limited scope of reference to this Special Bench which is to dispose and .....

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ther disallowance under section 14A of the Income-tax Act can be made in a year in which no exempt income has been earned or received by the assessee, is answered affirmatively against the assessee and in favour of the revenue." There is no contrary decision of jurisdictional Hon'ble High Court or the Hon'ble Apex court is pointed out by the assessee company before us to advance its proposition that no disallowance of expenditure is called for u/s 14A of the Act in case no exempt in .....

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g that it has incurred expenditure of ₹ 100/- towards its agricultural activity during the year while agriculture income received/earned during the year is NIL as there is a crop failure or destruction of crop due to natural calamity during the year, does it mean that the expenditure of ₹ 100/- incurred by the tax payer shall not be disallowed and be allowed to be set off against the income earned from manufacturing business just because there is no agricultural income during the yea .....

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use 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 .....

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curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which dedu .....

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ome. 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 app .....

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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 though of the nature specified in sections 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 .....

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rred" 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 investment brings down the cost. It will not increase the expenditure. Hence, expenditur .....

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s that profits and gains must be computed subject to certain allowances for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the facts of the case a proper Debit Item to be charged against the incomings of the business in ascertaining the true profits. A return of investme .....

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t case. Thus, in the absence of such proximate cause for disallowance, section 14A cannot be invoked. In our view, return of investment cannot be construed to mean "expenditure" and if it is construed to mean "expenditure" in the sense of physical spending still the expenditure was not such as could be claimed as an "allowance" against the profits of the relevant accounting year under sections 30 to 37 of the Act and, therefore, section 14A cannot be invoked. Hence, .....

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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 .....

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me would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil, whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or nil, would be credited. And the ultimate income or loss would be found. We fail to appreciate how expenditure which is otherwise a prope .....

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