9911796707
TMI Blog2006 (1) TMI 183X X X X Extracts X X X X X X X X Extracts X X X X ..... Terms used in Financial Statements (filed by the assessee) had defined a liability as the financial obligation of an enterprise other than owners funds . Therefore, on this ground also, the decision of the CIT(A) requires to be upheld. We do so and dismiss the ground. Exempted dividend income u/s 14A - Sec. 14A does not seek to touch upon the above controversy at all. In fact, it cannot, because the controversy has been settled in favour of the Revenue both judicially as well as statutorily as noted above. Now, s. 14A, as explained by the Memorandum Explaining the Provisions of the Finance Bill, 2001, which we have already quoted above, seeks to nullify the effect of certain judgments in which it has been held that in the case of an indivisible business, no part of the expenditure incurred by the assessee can be disallowed as relating to the exempted income. There is no dispute that the entire dividend, which is exempt u/s 10(33) was received from M/s Eicher Motors Ltd. by a single dividend warrant and no effort or expenses were necessary or were incurred to earn such income. There is also no material brought before us to show that the assessee s contention that no part of the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997-98 shows that it has followed the earlier order of the Tribunal in the assessee's own case for the asst. yrs. 1993-94 and 1994-95. The issue is thus squarely covered by the orders of the Tribunal in the assessee's own case for the asst. yrs. 1993-94, 1994-95 and 1997-98. Respectfully following the same, we decide the issue in favour of the assessee for the year under appeal. We may add that the facts relating to the ground are the same for the year under appeal also. The first ground is accordingly dismissed. 3. The second ground is that the CIT(A) erred, in allowing deduction of Rs. 1,35,417 under s. 35AB of the IT Act. A perusal of the assessment order does not throw any light on this issue. However, the assessee raised the ground before the CIT(A) to the effect that the AO has grossly erred in not allowing the deduction. Apparently, the claim was made in the computation of the income or in the course of the assessment proceedings. Be that as it may, the fact remains that the claim was not allowed in the assessment. On appeal, the CIT(A) noted that the assessee incurred expenses of Rs. 8,12,510 towards the cost of Mofa drawings in the previous year relevant to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, submitted that at any rate the provision cannot be considered as provision for unascertained liabilities so that it can be added back to the book profit. Reliance was placed on the order of the Delhi Bench of the Tribunal in the case of Modi Rubber Ltd. in ITA No. 3270/Del/1992 and the order in the case of Steel Authority of India Ltd. vs. Asstt. CIT (2001) 70 TTJ (Del)(TM) 849 : (2001) 76 ITD 69 (Del)(TM). Reliance was also placed on the judgment of the Bombay High Court in CIT vs. Echjay Forgings (P) Ltd. (2001) 166 CTR (Bom) 100 : (2001) 251 ITR 15 (Bom). The CIT(A) referred to Part III of Sch. VI to the Companies Act which contains the definition of the terms "provision". "reserves" and "liabilities". He noted that in terms of the definition contained in para 7(1) and (2) of Part III of Sch. VI, the provision for doubtful debts made in respect of specific debts was in the nature of a provision for ascertained liabilities and was not in the nature of reserve. Accordingly. he upheld the assessee's contention and directed the AO to reduce the book profit by the amount of Rs. 2,21,32,285. 6. The Revenue is in appeal. We have considered the riv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad or doubtful. It implies that monies receivable by the company may not be realised. Explanation (c) refers to amount set aside to provisions made "for meeting liabilities". By making the provision for bad and doubtful debts, the assessee is not guarding against any liability which it may be called upon to pay. For instance, a provision made for gratuity payable to the employees may properly be called a provision made for meeting a liability. But, when a provision is made to guard against the possible non-recovery of amounts due to the assessee, it cannot be described as provision made for meeting a liability. The Institute of Chartered Accountants of India (ICAI), in its guidance note on "Terms used in Financial Statements" (filed by the assessee) had defined a "liability" as "the financial obligation of an enterprise other than owners' funds". Therefore, on this ground also, the decision of the CIT(A) requires to be upheld. We do so and dismiss the ground. 8. We now take up the third ground which is that the CIT(A) erred in "deleting the addition of Rs. 5 lakhs made towards earning of exempted dividend income under s. 14A, igno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade or otherwise increasing the liability of the assessee under s. 154, for any assessment year beginning on or before the 1st day of April, 2001." The section was introduced by the Finance Act, 2001 with retrospective effect from1st April, 1962. The Memorandum Explaining the Provisions of the Finance Bill, 2001 [(2001) 166 CTR (St) 145 : (2001) 248 ITR (St) 162] explains the purpose behind the introduction of the section as under: "No deduction for expenditure incurred in respect of exempt income against taxable income. Certain incomes are not includible while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y which is not a business? If he is carrying on an activity which is not business, we must leave out of account the receipts of that activity. That is the first step. Secondly, we must look at s. 10(2) and deduct all the allowances permissible to him. In allowing a deduction which is permissible the question arises: Do we look behind the expenditure and see whether it has the quality of directly or indirectly producing taxable income? The answer must be in the negative for two reasons: First, Parliament has not directed us to undertake this enquiry. There are no words in s. 10(2) to that effect. On the other hand, indications are to the contrary. In S. 10(2)(xv), what Parliament requires to be ascertained is whether the expenditure has been laid out or expended wholly and exclusively for the purpose of the business. The legislature stops short at directing that it be ascertained what was the purpose of the expenditure. If the answer is that it is for the purpose of the business, Parliament is not concerned to find out whether the expenditure has produced or will produce taxable income. Secondly, the reason may well be that Parliament assumes that most types of expenditure which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GP. If it is not permissible under the Act, it has to be rejected. As mentioned earlier, it is not disputed that the cultivation of sugarcane and the manufacture of sugar constituted one single and indivisible business. Sec. 10(2) says that profits under s. 10(1) in respect of a business should be computed after deducting the allowances mentioned therein. One of the allowances allowed is that mentioned in s. 10(2)(xv) which says that any expenditure laid out or expended wholly and exclusively for the purpose of such business shall be deducted as an allowance. The mandate of s. 10(2)(xv) is plain and unambiguous. Undoubtedly, the allowance claimed in this case was laid out or expended for the purpose of the business carried on by the assessee. The fact that the income arising from a part of that business is not exigible to tax under the Act is not a relevant circumstance. For the foregoing reasons, we agree with the view taken by the High Court." While holding as above, the Supreme Court followed its earlier judgment in the case of CIT vs. Indian Bank Ltd. 13. Recently, the Supreme Court had occasion to examine the matter over again in Rajasthan State Warehousing Corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see." Since the finding was that the exempted income and taxable income were earned from one individual business, the Court held that the apportionment of the expenditure cannot be sustained. 14. Sec. 14A gives the AO the power to disallow expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The precise question that arises for consideration is whether it is necessary for the AO to show on the basis of the material on record that the assessee in fact incurred expenditure to produce non-taxable income which he may disallow or whether he can estimate a part of the expenditure incurred by the assessee as expenditure incurred to produce non-taxable income on the assumption that a part of the expenditure must have necessarily been incurred to produce non-taxable income. A look at the language of the section shows that the AO can disallow only expenditure "incurred" by the assessee in relation to the exempt income. The word "incurred" clearly implies that it must be shown as a fact that some expenditure was in fact incurred by the assessee to produce exempted income. It was open to the legislatu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the material on record. 16. Reference was made on behalf of the Department to the judgment of the Supreme Court in CIT vs. United General Trust Ltd. (1994) 116 CTR (SC) 194 : (1993) 200 ITR 488 (SC). To understand the judgment of the ratio laid down therein, we must refer to the judgment of the Bombay High Court in CIT vs. United General Trust Ltd. (1979) 119 ITR 664 (Bom), from which an appeal was taken to the Supreme Court. The judgment of the Bombay High Court is reported as Appendix to another judgment of the same High Court in CIT vs. Advance Insurance Co. Ltd. 1978 CTR (Bom) 538 : (1979) 119 ITR 660 (Bom). In this case, question No.4 was to the effect whether the assessee-company was entitled to the rebates under ss. 85 and 101(2) of the IT Act on gross dividends or on net dividends after the deduction of the costs relating thereto. While deciding this question, the Bombay High Court referred to its earlier judgment rendered on 30th Nov., 1976 in the case of CIT vs. United General Trust (P) Ltd.. which was unreported at that time, but later on reported as Appendix to the judgment in the case of Advance Insurance Co. Ltd. In the case of Advance Insurance Co. Ltd. th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee agreed that the question sought to be raised by the Revenue, which was not allowed by the Bombay High Court, was concluded against the assessee and in favour of the Revenue by the decision of the Supreme Court in Distributors (Baroda) (P) Ltd. vs. Union of India (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC). The Supreme Court also held that the same result would follow from s. 80AA, introduced by the Finance (No.2) Act, 1980 with retrospective effect from 1st April, 1968. For these reasons, the appeals filed by the Department were allowed and the application made by the CIT under s. 256(2) was deemed to have been allowed, a reference made and answered in the manner indicated above. 18. It seems clear to us from the above discussion that the controversy in the case of CIT vs. United General Trust, was (a) whether a question of law arose out of the order of the Tribunal as claimed by the Department; and (b) whether the question was covered in favour of the Revenue on merits? No doubt, the question framed contained a reference to "proportionate management expenses", but the focus of the controversy was whether the assessee was entitled to the deduction under s. 80M on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, but w.e.f. 1st April, 1981, have the same effect. The only difference was that s. 80M applied specifically to cases of deduction under s. 80M and s. 80AB applied to all cases of deduction other than s. 80M. This distinction has since been obliterated by an amendment made by the Finance Act, 1997 w.e.f. 1st April, 1998. By this amendment, s. 80M has been omitted and an amendment was made to s. 80AB to make it applicable to all deductions, claimed in respect of certain incomes. The thrust of both the sections is that where an assessee claimed deduction in respect of certain income which is included in the gross total income, then for the purpose of computing the deduction under the relevant section, the AO will have the power to compute the income in accordance with the relevant provisions of the IT Act. This in turn meant that the AO had the power to reduce the income in respect of which deduction is claimed by the amount of expenditure which was authorised by the Act to be deducted from the income. To give an example, if an assessee claimed deduction in respect of dividend under s. 80M, the dividends being taxable under the head "Income from other sources", the AO had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confers power or authority upon the AO to disallow such expenditure as satisfies the requirements of the section. What the AO could not do earlier, in view of the three binding judgments of the Supreme Court on the question, he can now do under s. 14A. The power is, however, subject to the rider that he must show that the assessee in fact incurred expenditure which is related to the exempted income. It, therefore, appears to us clear that the section only removes the disability on the part of the AO to disallow such expenditure, a disability to which he was subjected by the three judgments of the Supreme Court cited supra. The mere removal of the disability statutorily, however, does not ipso facto authorize him to assume that a part of the expenditure has been incurred by the assessee in relation to the exempted income and to proceed to disallow the same on estimate. The section does not, in our opinion, relieve the AO of the burden of proving, on the basis of evidence or material on record that the assessee has in fact incurred expenditure which has relation to the exempted income. Even in regard to s. 80M, the Calcutta and Madhya Pradesh High Courts have held that the AO cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it clear that in case, if the taxing authorities or assessee as the case may be is able to prove or show that a particular amount was actually incurred by an assessee in earning dividend income, then certainly to the extent the amount actually incurred has got to be deducted from gross dividend income and then the same is to be taken into consideration under s. 80M". (underlining, italicized in print, ours) It was further observed that since in the case before the High Court "the taxing authorities have not taken into consideration the actual expenditure incurred by an assessee while earning the dividend but has only proceeded to take notional expenditure, the same cannot be held to be sustainable in law" and that "it is not in accordance with the view even taken by Supreme Court in the case of Distributors (Baroda) (P) Ltd. Two aspects stand out, on a perusal of the above judgments. First, that the High Courts have not authorised the disallowance of any notional expenditure (as against actual expenditure) to reduce the income in respect of which deduction is claimed and second, that in the cases before the Calcutta High Court in En em our Investments Ltd. a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther proceeded to hold and we are respectfully in agreement with the same that the burden under s. 14A is on the Revenue to prove that interest paid by the assessee on borrowed funds related to the acquisition of shares yielding tax-free income. In para 61, the Tribunal further held that the words "in relation to" appearing in the section would include any expenditure which is proved (by the Revenue) to have nexus directly or indirectly with the utilisation of the funds for earning tax-free income. The question whether it was the duty of the AO to prove on the basis of material on record that the assessee actually incurred expenditure in relation to the exempted income did not precisely arise before the Tribunal nor has it been decided specifically. However, it seems to us that the decision could be construed as holding, albeit impliedly, that only actual expenditure incurred in relation to exempted income can be disallowed, because the Tribunal in terms held that the onus is on the Revenue to prove that interest paid by the assessee on borrowed funds related to acquisition of shares yielding tax-free income. Obviously, the Revenue would be in a position to discharge th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
