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TMI Blog2019 (6) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... stment was for strategic purposes?" During the concerned Assessment Years (AYs) 2008-09, 2011-12 and 2012-13, the assessee/respondent earned tax exempt income. When called upon to explain why disallowance should not be made under Section 14-A of the Income Tax Act, 1961 [hereafter "the Act"] during the assessment proceedings, it was contended that no expenditure was actually incurred on earning exempt income. The assessee also revealed that sums invested in mutual funds and in its subsidiary companies were initially brought in through Foreign Direct Investment (FDI) route and were awaiting use, for the purpose of township development. The assessee had to obtain several statutory and other clearances to launch this business activity. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of that expenditure is not to be allowed which has been incurred by the assessee "in relation to income which does not form part of the total income under this Act". Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. XXXXXX &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mind, the said provision has to be interpreted, particularly, the word "in relation to the income‟ that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14-A of the Act. This is so held in Walfort Share and Stock Brokers P Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom (SCC p.151, paras 34 & 36). "34. .....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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd V. CIT 2011 SCC Online Del 4855 where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well ..... X X X X Extracts X X X X X X X X Extracts X X X X
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