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TMI Blog2009 (8) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of Rs. 6,88,70,000 was invested in shares which was shown as investment for the purpose of long term capital gain by following the decision of Calcutta Bench of the Tribunal in the case K.V. Trading Co. Ltd. (formerly known as Kangra Valey Investment & Finance Co. Ltd.) vs. Dy. CIT in ITA No 924/Kol/2003 for asst. yr. 1998-99 and of Twenty First Securities Ltd. vs. Dy. CIT in ITA No. 1126/Kol/2003, on proportionate basis i.e., interest paid on borrowed funds invested in the form of long term investment other than the trading investment calculated as under: Unsecured Loans Rs. 8,51,65,000 Less: Loans and advance given Rs. 1,62,95,000 Less: Investment in unquoted shares (trade) Rs. 4,61,155 Rs. 1,67,56,155 &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct and, therefore, as a consequence thereof the interest paid on borrowed capital utilized in purchase of shares held as investment, being the expenditure incurred in relation to exempted dividend income, cannot be allowed against any other taxable income inasmuch as the interest so paid is not relatable to the earning of taxable income. Similar view has been expressed in Asstt. CIT vs. Dakshesh S. Shah (2004) 90 ITD 519 (Mumbai) and Harish Krishnakant Bhatt vs. ITO (2004) 85 TTJ (Ahd) 872 : (2004) 91 ITD 311 (Ahd)." 4. The learned counsel of the assessee Shri Ajay Vohra submitted that the assessee deals in a portfolio investment on capital account as well as of trading account. The investment which is held as a capital gain was offered to tax and expenses were disallowed with regard thereto. Insofar as the trading activity is concerned, the sale of shares was shown as business income and interest and other expenses are claimed as a deduction. He further submitted that in the year under consideration, the interest received was Rs. 1.01 crore as against interest payment of Rs. 1.21 crore. In the year under consideration the assessee had not received any dividend on the shares in wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of s. 14A can be applied. He further submitted that disallowance is envisaged under the aforesaid section, if exempt income has been earned during the relevant previous year. It was also submitted that the word "shall not" or "will not" (as opposed to 'does nor) which might have covered expenses incurred to earn exempt income in future as well. It was further submitted that aforesaid distinction in "shall not" vis-a-vis "does not" also gets fortified from the provisions of r. 8D of the IT Rules, 1962, which was inserted by the Finance Act, 2006 w.e.f.1st April, 2007. Therefore, he submitted that "does not" mean no income in present and it does not mean future income. 8. In this regard, he referred to the Special Bench decision of the Tribunal in the case of ITO vs. Daga Capital Management (P) Ltd. (2008) 119 TTJ (Mumbai) (SB) 289 : (2008) 15 DTR (Mumbai)(SB)(Trib) 68 : (2009) 117 ITD 169 (Mumbai)(SB). In this decision the Tribunal did not agree to the proposition on the ground that there must be an expenditure to earn income. On the contrary, it held that if there were income, expenditure is to be disallowed. It was asserted that what is relevant to consider is the object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n it was held that even if there were no income the expenditure is allowable. 9. He also referred to the decision of the Bombay Bench of the Tribunal in the case of Delite Enterprises (P) Ltd. vs. ITO (2008) 11 SOT 837 [sic-(2008) 22 SOT 245 (Mumbai)], wherein it was held that interest paid to the firm for earning income which was exempt under s. 10(2A) cannot be disallowed under s. 14A as that would not be applicable because there was no income. The said decision according to him is upheld by the High Court by stating that applicability of s. 14A in such situation does not arise. Learned counsel of the assessee also submitted a copy of the decision of the Bombay High Court in IT Appeal No. 10 of 2009 in which the Revenue raised the following question for consideration of the High Court, which was answered against the Revenue: "Whether on the facts and in the circumstances of the case and in law the Hon'ble Tribunal was right in deleting the disallowance made by the AO of interest paid by the assessee company on borrowed funds amounting to Rs. 241.10 lakhs overlooking the fact that he borrowed funds which were used by the assessee company to invest in the capital or another partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tarnik Investment & Trading Ltd. vs. Jt. CIT (2005) 94 TTJ (Del) 489 : (2005) 94 ITD 183 (Del) and the decision in the case reported in (2004) 90 ITD 519 (Mumbai) and in the case of Harish Krishnakant Bhatt vs. ITO which was distinguished on the ground that it was a case of investors in shares and not a dealer and the language of s. 57(iii) and s. 36(1)(iii) are not same. He again referred to the decision of the Special Bench in the case of Daga Capital Management (P) Ltd. dealing with the assessee's own case. He then referred to the provisions of s. 8D which is to be construed by us insofar as this case is concerned. 13. Learned senior Departmental Representative, Shri D.S. Srivastava, on the other hand, referred to para 26 of the Supreme Court decision in the case of CIT vs. Sun Engineering Works (P) Ltd. and apprised us the approach to be adopted to construing the ratio laid down in the decision of Supreme Court. He emphasized that the substance of the decision should be seen and not the words by picking a line from here and there. He submitted that s. 14A would apply to an exempt income whether received/earned or not received or not earned. He referred to the Memorandum Explai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en referred to the decision of the Supreme Court (sic-Calcutta) in the case of CIT vs. Anglo India Jute Mills Co. Ltd. (1981) 129 ITR 352 (Cal) wherein it is held that the assistance for machinery section for interpreting the statute can be taken. He then sought rule of mischief to be taken into consideration while interpreting the provision in view of the decision of the Madras High Court in the case of M.S.P. Raja & Anr. vs. CIT (1976) 105 ITR 295 (Mad), wherein it was held that if there is no income question of allowing any expenditure would not arise. He further stated that the term "in relation to" is wider than 'for making or earning income' and 'for the purpose of business' and, therefore the decision in the case of CIT vs. Rajendra Prasad Moody 1978 CTR (SC) 141 : (1978) 115 ITR 519 (SC) would apply with more or equal force. He then referred to the provision of s. 70 'providing for set off of losses'. He further submitted that s. 14A does not use the word "income of the year", but income under this Act and, therefore, the receipt of income in a particular year is not material for disallowing the expenditure. He further referred to the decision of the Special Bench in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the shares are held as stock-in-trade or held as investment. This section reads as under: "(34) any income by way of dividends referred to in s. 115-O. Explanation: For the removal of doubts, it is hereby declared that the dividend referred to in s. 115-O shall not be included in the total income of the assesses being a developer or entrepreneur." 19. Sec. 115-O as is referred to in above section reads as under: "115-O. (1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st April, 2003, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of twelve and one-half per cent. (2) to (5)........" 20. As the dividend income does not form part of total income under the Act the provisions of s. 14A would come into play. This section reads as under: "14A. Expenditure incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer the disallowance irrespective of the fact whether any income is earned by the assessee or not. Sec. 14A does not envisage any such exception. This is even if the interest paid on borrowings for the purchase of share were allowable under s. 57 as an expenditure incurred for earning or making income as held by the Supreme Court in the case of Rajendra Prasad Moody or under s. 36(1)(iii) as an expenditure incurred wholly and exclusive for the purposes of business as held by various decisions right from beginning of the IT Act. When prior to introduction of s. 14A, an expenditure both under ss. 36 and 57 was allowable to an assessee without such requirement of earning or receipt of income, we cannot import any such condition when it comes for disallowance of the same expenditure under s. 14A of the Act. This is what is held by the Ahmedabad Bench of the Tribunal in the case of Harish Krishnakant Bhatt when it observed that interest on monies borrowed for purchase of shares held as investment is not allowable whether or not there is any yield of dividend. It is so held by applying the decision of the Supreme Court in Rajendra Prasad Moody in the reverse case wherein it is that irres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this Court in Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1 (SC), 4 where interpreting the corresponding provision in s. 12(2) of the Indian IT Act, 1922, which was ipsissima verba in the same terms as s. 57(iii), Bose J., speaking on behalf of the Court, observed: 'It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned.' It is indeed difficult to see how, after this observation of the Court, there can be any scope for controversy in regard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'for making or earning income' and 'incurred wholly and exclusively for the purposes of business carried on by the assessee'. 28. Let us see whether the words 'does not' appearing in the term 'income which does not form part of total income' in s. 14A excludes a case of no earning or non-receipt of income from its ambit. When there is no income, it cannot form part of anything and certainly it does not, in any case form part of total income. In a contrast to put it differently, can one say 'does it form part of total income' the answer is no. The words "does not" of course, denotes the present situation, and not the future events as apprehended by the learned counsel to have been contemplated/attempted by the Revenue. In present tense also, 'no income or non-receipt of income' does not exist in something and therefore cannot form part of assessee's total income under the Act of the year, not because of its exemption but because of its absence and it is a fact. In such a situation it cannot be said that no disallowance is to be made or that the disallowance is resorted to by the Revenue in relation to future income. It is for the present current years' total income which does not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the borrowed money has been utilized in purchase of shares held both as investment as well as stock-in-trade. As the monies borrowed have been utilized in purchase of shares held, the interest paid on so borrowed monies is allowable against the income from dividend income either as incurred for making or earning dividend income on such shares or as incurred wholly and exclusively for the purposes of business carried on by the assessee, if he deals in such shares. It is in both the situations, irrespective of whether or not there is any yield of dividend on the shares purchased. In other words, the interest incurred is to be relatable to earning of dividend on the shares purchased. The dividend income is now exempted from tax by virtue of s. 10(34) of the Act, and, therefore, as a consequence thereof the interest paid on borrowed capital utilized in purchase of shares, being the expenditure incurred in relation to dividend income not forming part of assessee's total income, cannot be allowed as a deduction. There is no chargeable income against which it can be allowed as a deduction. It cannot also be allowed against any other taxable income inasmuch as the interest so paid is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion of application of provisions of s. 14A of the Act. In any case the Tribunal held that interest income was taxable as business income under s. 28(iv) of the Act and in that context the Tribunal held that "in this case, for both the assessment years, there is no income earned by the assessee which does not form part of the total income under the Act". Under these circumstances we do not see any reason why the claim of the assessee was not allowable under s. 36(1)(iii). This case does not help the (sic) had made investment in a partnership firm, income from which was exempt from tax under s. 10(2A) of the Act. Since investment in the partnership firm was made by the assessee out of borrowed funds, in the assessment orders for the asst. yrs. 2001-02 and 2002-03, the AO disallowed interest expenditure claimed by the assessee under s. 14A holding that since income derived from the partnership firm would be exempt under s. 10(2A) of the Act, the expenditure relatable to the earning of the income was to be disallowed in terms thereof. The appeal preferred by the assessee against the assessment orders was allowed by the CIT(A). In second appeal the Tribunal, after noting the facts th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not earned any dividend income. The only income is interest on fixed deposits with the bank. As against this income, the assessee had claimed expenditure of Rs. 2,69,85,000. Thus, it is seen that in the year in question there is no income of the assessee which is exempt under s. 10(33) of the Act. Relying on the decision by the Mumbai Bench of the Tribunal in the case of World Network Services (P) Ltd. vs. Dy. CIT in ITA No. 1833/Mum/2003 dt.25th Aug., 2006the Tribunal held that the provisions of s. 14A cannot be applied. It held that s. 14A is not applicable to the facts of the case and the assessee was carrying on the business. In these circumstances, the natural consequence that flows is that expenses claimed by the assessee are deductible in full under the head "Profit and gains from business or profession". It has been similarly held in the cases of Shree Shyamkamal Finance & Leasing Co. (P) Ltd. vs. ITO ITA No. 15/Mum/2006 and V.C. Nannapaneni vs. Asstt. CIT (2005) 95 TTJ (Hyd) 687 : (2005) 94 ITD 309 (Hyd). These are the cases before rendering of Special Bench decision in the Daga Capital Management (P) Ltd.'s case and the expenditure was held to be allowable under s. 36(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P) Ltd. (by a majority view) wherein it is held that in order to apply the provisions of said section, the exercise of making disallowance starts from tracing out the exempt income. Only once exempt income is traced, the process of working out the expenditure incurred in relation to the said exempt income gets initiated. These observations were because exempt income was there in consideration and that is why the Special Bench used this language. It should be read as a reference of the source of exempt income whether received or not. 41. The contention of the assessee before the Special Bench was that the Bench had to view the items of expenditure first and if these have resulted in exempt income, only then the disallowance is to be considered. In other words, the starting point for applying s. 14A is to consider the amount of expenditure and then moving forward for examining if it had resulted in the exempt income or not. This is exactly what the assessee is contending in this case though in different phraseology that there must be exempted income earned to disallow the expenditure. It was rightly rejected, by stating: "We are not convinced with the view point of the learned Autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not possible'........ We have already repelled the contention raised on behalf of the assessee that the object of the expenditure is to be viewed as a determinative factor for making any disallowance under this section. It is simple and plain that the disallowable expenditure is to be worked out which has relation with the exempt income and not otherwise. We are, therefore, not inclined to accept the assessee's version that if the exempt income is incidental to the main business whose income is taxable, then the provisions of s. 14A will be defeated." 42. Reference to exempt income was made because it was a case of exempted income earned and received by the assessee and not a case of no income earned or received. In the context of later position it be read as "exempted income/no income resulted" as the expenditure that is allowed or disallowed is for making or earning income or for the purposes of business or in relation to such income. If read in this way there would be no confusion in understanding the order of the Special Bench. 43. What one has to see is whether any expenditure were incurred by an assessee in relation to an income that does not form part of total income of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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