2011 (12) TMI 16 - HC - Income Tax

Common Expenditure for Exempt and Taxable Income - expression in relation to cannot be ascribed a narrow or constricted meaning - Held That - If we accept submissions of a assessees then sub-section (1) would be read as follows For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee with the main object of earning income which does not form part of the total income under this Act. That is certainly not the purport of the said provision. The expression in relation to does not have any embedded object. It simply means in connection with or pertaining to . If the expenditure in question has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the said Act. In Walfort (2010 -TMI - 76751 - SUPREME COURT), made it very clear that the permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the heads of income and is chargeable to tax

Issues Involved:
1. Allocation of common expenses towards taxable and non-taxable income under Section 14A of the Income Tax Act, 1961.
2. Consistency in applying Tribunal's decisions across different assessment years.
3. Procedural delays and administrative lapses by the Revenue.

Issue-wise Detailed Analysis:

1. Allocation of Common Expenses:
The core issue in these appeals is whether common expenses incurred by an assessee can be allocated towards taxable and non-taxable income under Section 14A of the Income Tax Act, 1961. The Tribunal's decision for the assessment year 1994-1995, which favored the assessee, was based on the view that Section 14A did not authorize the Assessing Officer to assume or deem certain expenditures as related to tax-free income without clear evidence. The Tribunal emphasized that only actual expenditures incurred in relation to earning tax-free income could be disallowed, not assumed or deemed expenditures.

2. Consistency in Tribunal's Decisions:
The court noted that the Tribunal's impugned judgment was based on its own decision for the assessment year 1994-1995, which was in favor of the assessee. The Revenue failed to appeal this decision, resulting in several adjournments over three years. The court highlighted the principle of consistency, stating that what holds for the assessee for the assessment year 1994-1995 should also apply to the assessment years under consideration (1989-1990, 1990-1991, and 1991-1992).

3. Procedural Delays and Administrative Lapses:
The court expressed amazement at the Revenue's failure to file an appeal against the Tribunal's decision for the assessment year 1994-1995, despite the substantial questions of law involved. The Revenue's counsel repeatedly sought adjournments to obtain instructions on whether an appeal was filed. The court criticized the Revenue for not taking recourse to an application seeking exemption from filing a certified copy of the judgment, which led to unnecessary delays.

Observations on Section 14A:
The Tribunal's judgment for the assessment year 1994-1995 was based on the interpretation that Section 14A, introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962, did not allow the Assessing Officer to deem or assume expenditures related to tax-free income. The Tribunal held that the expenditure must be factually incurred and clearly related to the exempt income. This view was contrary to some observations made by a coordinate bench in the Maxopp Investment Ltd. case, which emphasized that the expression "in relation to" should not be narrowly construed and should include expenditures connected with or pertaining to exempt income.

Remand to the Tribunal:
Given the conflicting interpretations, the court set aside the Tribunal's impugned judgment and remanded the matter for reconsideration in light of the Maxopp Investment Ltd. observations. The court opted for remand to ensure the Revenue's interests were not adversely affected in subsequent years, considering the recurrent nature of the issue. The court allowed parties to address all issues, including reassessment, on remand.

Administrative Directive:
The court recorded its displeasure with the Revenue's handling of the appeals and directed that a copy of the order be placed before the Chairman of the Central Board of Direct Taxes (CBDT). The Chairman was instructed to conduct an inquiry into the delay in obtaining the Tribunal's judgment for the assessment year 1994-1995 and complete the inquiry within two months. The report and action taken were to be placed on the court's record before the compliance date.

Conclusion:
The appeals were disposed of, with instructions for compliance listed for 03.02.2012.

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