2006 (8) TMI 229 - AT - Income Tax

Expenditure Incurred by dividend income - Disallowance of interest - investment in shares and debentures - cost of acquisition - HELD THAT - The issue before us was considered at length by the Ahmedabad Bench of Tribunal in Harish Krishnakant Bhatt s case 2004 (8) TMI 342 - ITAT AHMEDABAD concluded by holding that income being exempt from tax no part of expenditure attributable to earning of such exempted income was to be allowed after the insertion of section 14A and it was held Section 14A provides for disallowance of expenditure in relation to income which does not form part of the total income. It is assessee s own total income that is to be seen for applying the provisions of section 14A and not that of somebody else. Admittedly by virtue of section 10(33) dividend income is not includible/included in total income of an assessee shareholder. In other words by virtue of section 10(33) it does not form part of the total income of shareholder and therefore the expenditure incurred by the shareholder in earning that income would not be allowable. We hold that the interest paid on borrowed funds utilized for the purpose of investment in shares is not to be allowed as either an expenditure or as part of cost of acquisition of the shares in view of the provisions of section 14A of the Act. The appeal of the assessee is rejected. In the result the appeal filed by the assessee is dismissed.

Summary

Issues Involved:
1. Disallowance of interest under section 14A of the Income-tax Act, 1961.
2. Levy of interest under sections 234B and 234C without opportunity of hearing.

Issue-wise Detailed Analysis:

1. Disallowance of Interest:
The primary issue revolves around the disallowance of interest amounting to Rs. 2,81,889/- under section 14A of the Income-tax Act, 1961. The assessee had borrowed funds for investment in shares and debentures and claimed the interest paid on these borrowings as a deduction. Historically, this deduction was allowed against the dividend income earned by the assessee. However, with the introduction of section 10(33) exempting dividend income from tax and the retrospective application of section 14A, the Assessing Officer disallowed the interest claim. The CIT(A) upheld this disallowance, leading to the present appeal.

The tribunal noted that section 14A, inserted by the Finance Act, 2001 with retrospective effect from 1-4-1962, clearly stipulates that no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of the total income. The tribunal referenced the decision in Harish Krishnakant Bhatt's case, which clarified that when dividend income is exempt from tax, the related interest expenditure cannot be allowed as a deduction. The tribunal further dismissed the alternate claim of the assessee to treat the interest as part of the cost of acquisition of shares, citing that post-acquisition interest is considered revenue expenditure and not capital expenditure.

2. Levy of Interest under Sections 234B and 234C:
The second issue pertains to the levy of interest under sections 234B and 234C without providing the assessee an opportunity of hearing. The assessee contended that the interest was levied without passing a speaking order and without giving any opportunity of hearing. However, the tribunal did not provide a separate detailed analysis on this issue within the judgment text provided.

Conclusion:
The tribunal upheld the disallowance of interest under section 14A, confirming that interest on borrowings used to invest in shares, which yield exempt income, cannot be allowed as a deduction. The appeal by the assessee was dismissed, affirming the CIT(A)'s order. The judgment reinforces the principle that expenses related to earning exempt income are not deductible under the Income-tax Act.