TMI Blog2006 (1) TMI 614X X X X Extracts X X X X X X X X Extracts X X X X ..... sible non-recovery of amounts due to the assessee, it cannot be described as provision made for meeting a liability. The Institute of Chartered Accountants in India (ICAI), in its guidance note on terms used in financial statements (filed by the assessee) had defined a liability as The financial obligation of an enterprise other than owners funds . Therefore, on this ground also, the decision of the CIT(A) requires to be upheld. We do so and dismiss the ground. Interest on borrowings - disallowance u/s 14A - Section 14A gives the Assessing Officer the power to disallow expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The precise question that arises for consideration is whether it is necessary for the Assessing Officer to show on the basis of the material on record that the assessee in fact incurred expenditure to produce non-taxable income which he may disallow or whether he can estimate a part of the expenditure incurred by the assessee as expenditure incurred to produce non-taxable income on the assumption that a part of the expenditure must have necessarily been incurred to produce non-taxable income. The con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture and sale of tractors, engines, motorcycles, gears and other components. 2. The first ground is that the CIT(A) erred in allowing depreciation of ₹ 2,69,700 ignoring the fact that the furniture and fixtures were not used by the assessee for its business. At the time of the hearing, the Ld. Counsel for the assessee drew our attention to paras 4 5 of the order of the Tribunal dated 26-8-2004 in the assessee s own case for the assessment year 1997-98 in ITA No. 2863/D/01 in which this issue has been decided in favour of the assessee. A copy of the order was also filed. A perusal of the assessment order for the year under appeal shows that the Assessing Officer disallowed the depreciation on the basis of the reasons given by him in the earlier years. The CIT(A) has brought on record the facts relating to the dispute. The assessee made additions to televisions, refrigerators, music systems etc., which were provided to its employees with an option given to them to purchase the same at the WDV after five years. This was in accordance with a scheme framed by the assessee in this regard. The reason for the disallowance of the depreciation as recorded by the CIT(A), is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity in his direction. Further, we were informed that for the assessment year 1997-98 against a similar direction given by the CIT(A), the department did not prefer any appeal to the Tribunal. The ground is, therefore, dismissed. 5. Ground No. 4 is that the CIT(A) erred in directing the Assessing Officer not to add the provision towards bad and doubtful debts while computing the book profit for the purpose of section 115JA of the Income-tax Act. It is contended that the provision is not an ascertained liability. In the assessment order, the Assessing Officer added back ₹ 2,21,32,285 being provision for bad and doubtful debts to the income shown in the return, while computing the book profit under section 115JA. The assessee took up the plea before the CIT(A) that book profit for the purpose of the section means the profit ascertained as per the P L A/c. prepared by the assessee in accordance with Parts II III of Schedule VI to the Companies Act, subject only to the adjustments specified in the Explanation below the section. It was pointed out that the clause (c) of the Explanation provides for adding back the provision, made for meeting liabilities other than ascertained liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made for doubtful debts after taking note of specific debts cannot be considered as a reserve, so that clause (b) of the Explanation can be invoked, but has to be considered as a provision for an ascertained liability. The CIT(A) has noted in para 7(1) of Part-III of Schedule VI to the Companies Act which shows that expression provision shall mean any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of asset or retained by way of providing for any known liability of which the amount cannot be determined as substantial accuracy. The provision made by the assessee by taking into account specified and identified debts which were doubtful of recovery satisfies the above definition of a provision. It is not expected of the company to determine accurately the amount in respect of which it is allowable and it is sufficient that the liability is ascertained. Accordingly, the CIT(A) seems right in saying that the provision for doubtful debts is really in the nature of a provision for meeting an ascertained or known liability. 7. Before us, the Ld. Counsel for the assessee raised a plea that this is not a provision for meeting a liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidend income. It was also contended that the shares from which the dividend was received were required by the assessee from its own funds in the earlier years and, therefore, no interest on borrowings could also be attributed to the earning of the dividend income. In support of the above contentions, the assessee placed reliance on certain decision of the Calcutta High Court. Another contention raised by the assessee was that the disallowance under section 14A can be made only if it is shown that some expenses were in fact incurred to earn the exempted income and that no disallowance can be made on estimate. 9. The CIT(A) agreed with the assessee s contention that no disallowance can be made under section 14A on estimate basis and that only those expenses which have been actually incurred to earn the exempted income can be disallowed. Notional or proportionate expenses cannot be disallowed in the absence of material on record to support the same. He accordingly deleted the disallowance of ₹ 5 lakhs. 10. Section 14(A) of the Income-tax Act is as under : Expenditure incurred in relation to income not includible in total income. 14A. For the purposes of computing the total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vested huge sums in securities of the Mysore Government, the interest from which was exempt from income-tax. The bank also brought and sold these securities and the profit or losses were taken into account under the head Business . In the assessment, the bank claimed, deduction in respect of interest paid on its deposits under section 10(2)(iii) of the 1922 Act. The Assessing Officer, whose action was upheld by the Tribunal, disallowed a part of the interest which according to him was payable on monies borrowed for the purchase of the Mysore Government securities. Before the Supreme Court, it was pointed out on behalf of the assessee that since profits or losses on the disallowance in the Mysore Government securities were assessed under the head Business , no part of the interest could be disallowed as interest attributable to borrowings made for producing exempted income. The Supreme Court accepted this contention, but also proceeded also to examine the validity of the action of the Assessing Officer as to whether a part of the expenditure attributable to the exempted income can at all be disallowed. It was held by the Supreme Court as under: We are concerned with the interpretati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity was a taxable activity whereas the sugarcane growing activity was agricultural activity. The finding of the Tribunal was that the cultivation of sugarcane as well as the manufacture of sugar constitute one business and this finding was not challenged. The assessee paid managing agency commission and the question was whether part of the commission can be disallowed on the ground that it related to the sugarcane cultivation which was an agricultural operation. At page 454 of the Report, the Supreme Court held as under : What was urged on behalf of the department is that the assessee s business consisted of two parts, namely, (1) cultivation of sugarcane and (2) the manufacture of sugar. The former part being agricultural operation, the income therefrom is not exigible to tax and therefore any expenditure incurred in respect of that activity is not deductible. This contention proceeds on the basis that only expenditure incurred in respect of a business activity giving rise to income, profit or gains taxable under the Act can be given deduction to and not otherwise. We see no basis for this contention. To find out whether a deduction claimed is permissible under the Act or not, all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be followed in cases of this type: In view of the above discussion, the following principles may be laid down : (i)if income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head whether or not computation under each head results in taxable income ; (ii)if income of an assessee arises under any of the heads of income but from different items, e.g., different house properties or different securities, etc., and income from one or more items alone is taxable whereas income from the other item is exempt under the Act, the entire permissible expenditure in earning the income from that head is deductible; and (iii)in computing profits and gains of business or profession when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Act will depend on : (a)fulfillment of requirements of that provision noted above; and (b)on the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to closely related persons or concerns, is excessive or unreasonable having regard to the fair market value of goods, services or facilities for which the payment is made or the legitimate needs of the business or the benefit derived by the assessee from the expenditure. But, when section 14A has not given such specific power to the Assessing Officer, he has no authority to estimate the expenditure which the assessee would have, in the opinion of the Assessing Officer, incurred in relation to the exempted income. The words in relation to income which is exempt under the Act, no doubt, appear to be broad at first impression, but on deeper examination, and read in conjunction with the word incurred , it seems to us that these are restrictive words, restricting the power of the Assessing Officer to estimate a part of the expenditure incurred by the assessee as relatable to the exempted income. It seems to us that implicit in the expression in relation to is the concept that the Assessing Officer should be in a position to pin point, with an acceptable degree of accuracy, the expenditure which was incurred by the assessee to produce non-taxable income. The word incurred signifies that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t when the matter came up for final decision, it appears that the High Court felt that the question did not really arise out of the Tribunal s order and that in any case it was concluded also by the judgments of the Bombay High Court in the case of Sahu Brothers (Saurashtra) (P.) Ltd. (citation not given) and New Great Insurance Co. Ltd. (supra). The Bombay High Court further noted that the question appears to be finally concluded by the judgment of the Supreme Court in the case CIT v. South Indian Co. Ltd. [1963] 59 ITR 763 as also the decision of the Bombay High Court in CIT v. Industrial Investment Trust Co. Ltd. [1968] 67 ITR 436 . Before the Bombay High Court, an argument was advanced on behalf of the department that the question in respect of which the High Court had issued the rule can be said to deal with one of the aspects of the legal contention urged before the Tribunal and in this connection reliance was made on the amendment placed to section 80M by section 10 of the Finance Act, 1968. The High Court examined the contention with reference to the statement of Objects Reasons and the Notes on Clauses of the Finance Bill and found that the reason for omitting certain word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 1-4-1989. In view of this position, the Supreme Court not only admitted the question for reference under section 256(2), but also answered the same against the assessee. The real controversy in the above case was not so much as to whether the Assessing Officer had the power to estimate certain expenses as having been incurred for the purpose of earning the dividend income and, therefore, they could be deducted from the gross amount of the dividend, so that the deduction could be worked out only on the net dividend, as it was on the pure question of law as to whether the deduction was available to an assessee on the gross amount of the dividend or the net amount of dividend. It was this pure question of law that was decided by the Supreme Court and not the question whether a particular type of expenditure could or could not be deducted from the gross dividend or whether the Assessing Officer did or did not have the power, in the absence of any material on record, to estimate a part of the expenditure incurred by the assessee as having been incurred for the purpose of earning the dividend income and proceed to deduct the same from the gross amount of the dividend in order to calcul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reduce the same by an amount of expenditure incurred to earn the income. Both judicially as well as by retrospective amendment to the Income-tax Act, the controversy was set aside. The principle was thus settled, namely, that the deduction was available to an assessee only on the net income. The judgment of the Supreme Court in the case of United General Trust Ltd. (supra) has been rendered in the context of this controversy which involved an important principle of law. Once the controversy was settled both judicially as well as statutorily, there is no scope for re-agitating the matter. 20. Section 14A does not seek to touch upon the above controversy at all. In fact, it cannot, because the controversy has been settled in favour of the revenue both judicially as well as statutorily as noted above. Now, section 14A, as explained by the memorandum explaining the provisions of the Finance Bill, 2001, which we have already quoted above, seeks to nullify the effect of certain judgments in which it has been held that in the case of an indivisible business, no part of the expenditure incurred by the assessee can be disallowed as relating to the exempted income. Obviously, the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any estimate of expenditure being made and no notional expenditure can be allocated also for the purpose of earning income unless the facts of a particular case warrant such allocation. [Emphasis supplied] Referring to the above judgments, the Madhya Pradesh High Court held in State Bank of Indore v. CIT [2005] 144 Taxman 72 , as under : 13. The question may still arise as to whether any notional expenditure can be taken into consideration for the purpose of deduction while calculating the income from dividend or only expenditure actually incurred by an assessee can be taken into consideration while calculating the deduction claimed under section 80M. In our considered opinion, there lies a distinction between what we call notinal expenditure and actual expenditure. If it is proved to be a case of actual expenditure incurred by an assessee while earning/depositing the dividend then certainly the amount actually incurred by way of expenditure has got to be deducted in accordance with the procedure prescribed under the Act. But when there is nothing on record to show that any expenditure is incurred by an assessee while earning/deposting the dividend then it is difficult for us t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 5 lakhs. There is no dispute that the entire dividend of ₹ 83,02,635 which is exempt under section 10(33) was received from M/s. Eicher Motors Ltd. by a single dividend warrant and no effort or expenses were necessary or were incurred to earn such income. These is also no material brought before us to show that the assessee s contention that no part of the interest can be attributed to the earning of the dividend income since the shares were acquired from the own funds in the earlier years and not from borrowed funds, is factually incorrect. In these circumstances, we have to agree with the assessee that there is no material on the basis of which the Assessing Officer would estimate and disallow a sum of ₹ 5 lakhs by invoking section 14A. We, therefore, agree with the decision of the CIT(A), affirm the same and dismiss the Ground No. 3. 22. In the course of the arguments, reference was made to the order of the Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 in winch a question of disallowance under section 14A arose and was considered. A perusal of the order of the Tribunal shows that the purely legal aspect of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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