2006 (12) TMI 266 - AT - Income Tax

Expenditure incurred in relation to income not includible in total income Business income Penalty - For concealment of income

Summary

Issues Involved:
1. Disallowance of interest expenditure under section 14A of the Income-tax Act, 1961.
2. Disallowance of stamp duty as business expense.
3. Non-consideration of stamp duty as addition to closing stock of shares.
4. Non-allowance of carry forward of business loss.
5. Penalty under section 271(1)(c) of the Income-tax Act.

Detailed Analysis:

1. Disallowance of Interest Expenditure under Section 14A:
The primary issue revolves around whether the interest expenditure incurred on borrowed funds, which were invested in the acquisition of shares, is allowable under section 36(1)(iii) of the Income-tax Act. The Assessing Officer disallowed the interest expenditure, arguing that since dividend income is exempt under section 10(33), the related interest expenditure cannot be allowed. The CIT(A) upheld this disallowance, treating the acquisition of shares as an investment rather than a business transaction. The Tribunal examined various judgments and the legislative intent behind section 14A, which was introduced to nullify the effect of the Supreme Court's decision in Rajasthan State Warehousing Corpn. v. CIT. The Tribunal concluded that the interest expenditure incurred on funds used to acquire shares, which yield exempt income, is not allowable against taxable income due to section 14A.

2. Disallowance of Stamp Duty as Business Expense:
The assessee claimed that the stamp duty paid should be allowed as a business expense. However, the Tribunal held that since the expenditure on stamp duty increases the capital of the assessee, it cannot be allowed as a business expense. Consequently, this ground was dismissed.

3. Non-Consideration of Stamp Duty as Addition to Closing Stock of Shares:
The assessee argued that the stamp duty should be considered as an addition to the closing stock of shares. The Tribunal, however, did not find merit in this claim and dismissed this ground as well.

4. Non-Allowance of Carry Forward of Business Loss:
The assessee contended that the carry forward of business loss should be allowed as claimed in the return of income. The Tribunal deemed this ground to be consequential in nature and did not provide a detailed ruling on it.

5. Penalty under Section 271(1)(c):
The Tribunal addressed the penalty levied under section 271(1)(c) for the disallowance of pro rata interest expenditure. It was argued that the issue of whether the expenditure incurred to earn taxable and non-taxable income is indivisible is a debatable one. The Tribunal found that the assessee raised the claim under a bona fide belief and was not guilty of concealment of income or furnishing inaccurate particulars. Consequently, the penalty was deleted.

Conclusion:
- The Tribunal upheld the disallowance of interest expenditure under section 14A.
- The claim for stamp duty as a business expense and its addition to the closing stock of shares was dismissed.
- The issue of carry forward of business loss was deemed consequential.
- The penalty under section 271(1)(c) was deleted, recognizing the bona fide belief of the assessee in making the claim.