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2008 (5) TMI 693 - AT - Income TaxInvestment in shares for earning dividend income - addition made u/s 14A - expenditure on interest paid on borrowed funds - whether expenditure incurred on borrowed funds which are invested in the shares of other companies, the dividend income therefrom is exempt, would be allowable as deduction against other income which is taxable - CIT held that the claim of assessee is allowable as a business expenditure as it was inclined on grounds of commercial expediency. Whether it would make any difference to the application of Section 14A if the borrowed funds were earlier accounted for in the merged companies and after merger they are accounted for in the assessee company - HELD THAT - In our considered view, it will not make any difference in the applicability of Section 14A in the case of assessee company. It is undisputed fact that the claim of expenditure is debited in the accounts of the assessee company, therefore, allowability of this claim has to be examined only in the hands of assessee company. It is immaterial from where funds are borrowed into the assessee company or whether those funds were held by any other companies which merged into the assessee company and finally as a result of merger assessee company look over the assets and liabilities including the liability of borrowed funds and thereby committing to make payments of financial charges in respect of such borrowed funds. Similarly, where dividend income is earned from the shares then such income would be taxable in the hands of the assessee in subsequent years when dividend income is held taxable. In any case, the taxability of exemption of dividend income has to be examined only in the hands of assessee company in the light of Section 10(33)/115O of the Act. Similarly, claim of expenditure in relation to such exempted income will have to be examined in the hands of assessee company. Therefore, the first argument of the Assessee is rejected. Whether expenditure was actually incurred or not also does not arise. Once expenditure is actually incurred then the only question that remains to be (sic) whether it can be allowed against other business income if no dividend income is earned? - HELD THAT - Merely because the assessee docs not earn anything his entire expenditure in relation to such dividend income would be set off against other taxable income whereas if another assessee earns from dividend and then his expenditure incurred in relation thereto could not be set off against other taxable income. In a similar situation, Hon'ble Supreme Court in Rajendra Prasad Moody's case (supra) observed that such a result is highly strange and anomalous. Once the assessee has invested money in shares for earning dividend income then computation of dividend income has to be carried out separately under a separate head. The expenditure relating thereto has to be accounted for as per Section 57(iii). This computation may lead to a positive income or may lead In negative income depending upon whether receipts are higher or expenditure is higher. Even if there is no income from dividend still then expenditure relating there to will have to be accounted for u/s 57(iii) only. If dividend income is not exempt then loss arising as a result of computation of dividend income under the head 'income from oilier sources' will fall for set off against 'other income'. It dividend income is exempt u/s 10(33) of the Act then loss arising as a result of computation of dividend income would not be available for set off by virtue of Section 14A. In other words, by computing dividend income in accordance with Sections 56 to 59 -under the head 'income from other sources' the resulting figure, whether positive or negative, will be considered as exempt Under Section 10(33) i.e. it will not be available for inclusion while computing total income of the assessee. ITAT Mumbai Bench in the case of ACIT v. City Corp Finance Ltd. 2007 (10) TMI 446 - ITAT MUMBAI held that the expenditure incurred in relation to dividend income would not be allowable as deduction against other income. Similar view was held by the Hon'ble ITAT Mumbai Bench in the cases of Mohanlal M Shah v. Dy. CIT 2006 (8) TMI 229 - ITAT BOMBAY-G , Harish Krishnakant Bhatt v. ITO 2004 (8) TMI 342 - ITAT AHMEDABAD , ACIT v. Dakshesh S Shah 2003 (2) TMI 434 - ITAT MUMBAI and D.J. Mehta v. ITO 2006 (3) TMI 205 - ITAT BOMBAY-I . As a result, we hold that in view of majority of the decisions of various Benches of the Tribunal that expenditure incurred in relation to earning exempted income would not be allowable as deduction against other income, the expenditure will not be allowed to be set off against other business income as it is incurred in relation to dividend income which is not includible in the total income. Further for the purposes of allowability or disallowability of such expenditure it is immaterial whether any income (which is exempt Under Section 10(33)) is actually earned or not. As a result, we allow the appeal of the Revenue.
Issues Involved:
1. Disallowance of interest expenditure under Section 14A of the Income Tax Act. 2. Applicability of commercial expediency in allowing interest expenditure. 3. Relevance of earning actual dividend income for disallowance under Section 14A. Issue-wise Detailed Analysis: 1. Disallowance of Interest Expenditure under Section 14A: The primary issue in this case is whether the interest expenditure of Rs. 34,92,373/- incurred by the assessee on borrowed funds, which were invested in shares, should be disallowed under Section 14A of the Income Tax Act. The AO disallowed this expenditure, arguing that the investment generated only dividend income, which is exempt from tax. The CIT(A) allowed the claim, but the Revenue appealed against this decision. 2. Applicability of Commercial Expediency in Allowing Interest Expenditure: The CIT(A) allowed the interest expenditure, citing commercial expediency and referring to the Supreme Court's decision in S.A. Builders Ltd. v. CIT 158 Taxman 74. The CIT(A) held that the investments were made to have a controlling stake in the company, which satisfies the test of commercial expediency. However, the Tribunal disagreed, stating that the allowability of the claim must be examined in the hands of the assessee company, regardless of the origin of the borrowed funds. 3. Relevance of Earning Actual Dividend Income for Disallowance under Section 14A: The Tribunal rejected the argument that if no dividend income is earned, the question of disallowing the expenditure does not arise. It emphasized that Section 14A disallows expenditure incurred in relation to income not includible in total income, regardless of whether such income is actually earned. The Tribunal referred to various judgments, including CIT v. Rajendra Prasad Moody and CIT v. M. Ethurajan, which held that the allowability of expenditure does not depend on the actual earning of income. Conclusion: The Tribunal concluded that the expenditure of Rs. 34,92,373/- incurred in relation to earning dividend income, which is exempt under Section 10(33), cannot be allowed as a deduction against other business income. It held that for the purposes of Section 14A, it is immaterial whether any income is actually earned. The appeal of the Revenue was allowed, and the order of the CIT(A) was vacated. The decision was pronounced in open court on 23.5.08.
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