2011 (1) TMI 407 - HC - Income Tax

Applicability of Sec.14A - Whether expenditure claimed by the assessee on the payment of interest on borrowed capital was admissible - The Tribunal remanded the matter to the Assessing Officer to determine the question as to how acquisition of shares in the earlier years was financed, in the context of applicability of Section 14A of the Act, no interference is called for at this stage - The Assessing Officer has to go into the question of admissibility of expenditure in relation of income which does not form part of the total income as required under Section 14A(1) of the Act - The question is accordingly answered against the assessee.

Summary

Issues:
Applicability of Section 14A of the Income Tax Act to an assessee following cash system of account with no expenditure incurred for exempt dividend income.

Analysis:
The appeal was filed by the assessee against the order of the Income Tax Appellate Tribunal regarding the applicability of Section 14A of the Income Tax Act. The assessee, engaged in banking and financing, received dividend income exempt under Section 10(33) of the Act. The Assessing Officer disallowed the expenditure claimed by the assessee under Section 14A, which was contested by the assessee. The CIT(A) allowed the deduction claimed by the assessee, stating a lack of direct nexus between the investment made and the borrowed amount. However, the Tribunal allowed the revenue's appeal, remanding the matter to determine the financing of shares acquisition in earlier years.

The counsel for the assessee argued that Section 14A was not retrospective and no evidence supported the disallowance of expenditure without establishing a nexus between the investment and borrowed amount. It was contended that unless a connection between borrowed funds and investment in shares was proven, disallowance under Section 14A was not justified. On the other hand, the revenue's counsel cited precedents to support the retrospective applicability of Section 14A from 1.4.1962, emphasizing its clarificatory nature to prevent claiming expenses related to exempt income reduction.

The Court held that since the question of the admissibility of expenditure on interest payment was remanded concerning Section 14A's applicability, no interference was warranted at that stage. The Assessing Officer was directed to assess the expenditure's admissibility concerning income not forming part of the total income as per Section 14A(1) of the Act. Consequently, the appeal was dismissed, and the question was answered against the assessee.