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2008 (2) TMI 455 - AT - Income TaxDisallowance of interest - Expenditure Incurred - composite activity of subletting, inter-corporate deposits and investment in shares - earned dividend from investment in shares - scope and applicability of retrospective amendment and section 14A - Powers of Assessing Officer - HELD THAT - We have examined the issue regarding applicability of section 14A by the appellate authorities and have held in earlier part of this order that CIT(A) and the Tribunal are empowered to apply the provisions of section 14A in the appeals pending before them for the assessment year 2001-02 and earlier years even if section 14A had not been invoked by the Assessing Officer or the said provision was not available at the time of assessment. In this case, though the assessment for the assessment year 1998-99 had been completed by the Assessing Officer before section 14A was inserted on the statute, but the appeal for the said year is still pending before the Tribunal. The perusal of the balance sheet shows that in the beginning of the year i.e., on 1-4-1997, the funds available with the assessee were to the tune of Rs. 145 lakhs, which consisted of own funds of Rs. 22.60 lakhs and borrowings of Rs. 122.40 lakhs. As against that, the investments were Rs. 16.42 lakhs in fixed assets; Rs. 88.82 lakhs in shares and balance in loans and advances. The investment in shares remained for the entire year as the closing balance of share was Rs. 98.70 lakhs. The borrowings also continued with a closing balance of Rs. 115.70 lakhs. These figures clearly show that substantial borrowings were utilized for investment in shares as own funds were only to the tune of Rs. 22.60 lakhs out of which investment in fixed assets alone was Rs. 16.42 lakhs. The investments in shares of the subsidiary company are long-term investments and are not held as trading stock. The dividend income received/receivable from the investment in shares is not taxable with effect from 1-6-1997. In this year since the dividend was received on 9-5-1997 for earlier year, it was taxable and had rightly been offered for tax. But after the record date in may 1997 any dividend that may be received after 1-6-1997 is not taxable. Therefore, the borrowings utilized in investment of shares are not going to yield any taxable income after 31-5-1997. Thus, the interest on borrowings utilized in investment in shares for the period 1-6-1997 to 31-3-1998, is not allowable as deduction while computing the taxable income of the assessee in view of section 14A. In fact, the assessee, before the lower authorities had made an alternate submission that disallowance of interest if any could be made only for the period 1-6-1997 to 31-3-1998. There is a prima facie case as pointed out earlier that substantial borrowings have been utilized for investment in shares. However, exact computation of interest on borrowings utilized for investment in shares will require detailed scrutiny. We, therefore, restore this issue to the file of the Assessing Officer for quantification of interest for the period1-6-1997 to 31-3-1998 in respect of borrowings utilized for investment in shares and the same will be disallowed. The balance interest will be allowed as deduction as no other tax-free income has been brought to our notice. We order accordingly. Consequently, the ground taken by the assessee is allowed for statistical purposes.
Issues Involved:
1. Applicability of Section 14A in appellate proceedings. 2. Applicability of Section 14A to assessments of earlier years pending in appeal. 3. Power of CIT under Section 263 regarding disallowance of expenses under Section 14A. 4. Power of CIT(A) to enhance disallowance under Section 14A during appellate proceedings. 5. Impact of the proviso to Section 14A on pending appeals and reassessments. Issue-wise Detailed Analysis: 1. Applicability of Section 14A in Appellate Proceedings: The Tribunal held that Section 14A, which disallows deductions for expenses incurred in relation to income not forming part of the total income, is applicable to appellate proceedings. This includes cases where the assessment year is prior to the enactment of Section 14A, provided the appeal is still pending. The Tribunal emphasized that the retrospective nature of Section 14A requires it to be applied by appellate authorities, including the Tribunal and CIT(A), even if the AO did not invoke it during the initial assessment. 2. Applicability of Section 14A to Assessments of Earlier Years Pending in Appeal: The Tribunal clarified that the proviso to Section 14A, which restricts the AO from reassessing or rectifying assessments for years prior to 1st April 2001, does not apply to appellate authorities. The Tribunal and CIT(A) can invoke Section 14A in pending appeals for earlier years. This interpretation ensures that the retrospective effect of Section 14A is not nullified by the proviso, allowing appellate authorities to disallow expenses related to exempt income even for past years. 3. Power of CIT under Section 263 Regarding Disallowance of Expenses under Section 14A: The Tribunal upheld the CIT's power under Section 263 to revise an assessment order if the AO failed to apply Section 14A. This power is not restricted by the proviso to Section 14A. The Tribunal cited the case of Hexa Securities & Finance Co. Ltd., where the CIT invoked Section 263 to disallow expenses related to exempt income, despite the assessment being completed before Section 14A was enacted. The Tribunal agreed that the CIT's revisional powers remain unaffected by the proviso, allowing for the correction of errors in applying Section 14A. 4. Power of CIT(A) to Enhance Disallowance under Section 14A During Appellate Proceedings: The Tribunal confirmed that CIT(A) has the authority to apply Section 14A and enhance disallowance during appellate proceedings, even if the AO did not invoke Section 14A. This power is derived from the appellate authority's mandate to ensure the correct application of law, including retrospective amendments. The Tribunal emphasized that the proviso to Section 14A does not curtail CIT(A)'s power to address issues related to exempt income and associated expenses in pending appeals. 5. Impact of the Proviso to Section 14A on Pending Appeals and Reassessments: The Tribunal interpreted the proviso to Section 14A as limiting only the AO's power to reassess or rectify completed assessments for years prior to 1st April 2001. It does not restrict appellate authorities from applying Section 14A in pending appeals. This interpretation ensures that the retrospective application of Section 14A is upheld, allowing appellate authorities to disallow expenses related to exempt income for earlier years, thus maintaining the integrity of the legislative intent behind Section 14A. Conclusion: The Tribunal concluded that Section 14A applies to appellate proceedings and pending appeals for earlier years, allowing for the disallowance of expenses related to exempt income. The powers of CIT under Section 263 and CIT(A) during appellate proceedings remain unaffected by the proviso to Section 14A, ensuring the correct application of the law. The appeal was allowed for statistical purposes, with the issue of interest disallowance remanded to the AO for detailed scrutiny and quantification.
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