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TMI Blog2006 (10) TMI 250X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the matter, she ought not to have upheld the said disallowance of Rs. 60,220/-." 2. Shri Sunil Hirawat, learned Counsel appeared for the assessee and Shri R.N. Parbat/Ms. Aparna Saxena, Departmental Representatives appeared for the revenue and put forward their rival submissions. 3. At the time of hearing, the assessee has submitted the summary of propositions, which are considered by the Bench and the same are as under: "1. Provisions of section 14A are not applicable to expenditure incurred in relation to dividend income because dividend, through EXEMPT in the hands of the shareholder, is liable to tax under section 115-O, and the shareholder only earns dividend after such tax is paid. 2. Without prejudice to (1) above : 2.1. Interest on borrowings attributable to investments made in Foreign Companies should not be subjected to disallowance because dividend from Foreign Companies is not governed by section 115-O and hence it is not exempt in the hands of the shareholders. 2.2 Interest on borrowings attributable to investment made in Units of Growth Fund should not be subjected to disallowance because Growth Fund does not pay any dividend - leave aside exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee and the expenditure incurred in relation to the earning of dividend income which does not form part of total income in view of section 10(33) of the I.T. Act is not an allowable deduction. Accordingly confirmed the disallowance of interest of Rs. 4,12,57,221/- and restricted the disallowance out of administrative and other expenditure to Rs. 60,220/- being 10 per cent of 6,02,207/- i.e., after allowing the expenditure Audit Fees and Audit expenses for Tax Audit. Assessee is aggrieved and hence this appeal. 5. The issue in the first ground of appeal is with regard to disallowance of the interest paid by the assessee-company during the year under consideration amounting to Rs. 4,12,57,221/-. The Learned AR for the assessee stated that the provisions of section 14A of the Act are not applicable to the expenditure incurred in relation to earning of dividend income because the dividend income though exempt in the hands of the assessee i.e., the shareholder is liable to be taxed under section 115-O of the I.T. Act being tax levied on the company, who is the distributing company and the shareholder only earns net dividend after such taxes are paid. Reliance was placed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Act, the provision of law is clear that while computing the income of the person, no deduction of expenditure incurred for earnings exempt income is to be allowed. The learned DR in reply submitted that the issue in the present appeal had been considered at length by the Ahmedabad Bench of Tribunal in Harish Krishnakant Bhatt v. ITO [2004] 91 ITD 311 . The learned DR also stated that the annual accretion to the units of growth fund are not amenable to tax and capital gains is charged to tax only on sale of the said units and thus no part of the expenditure relatable to such investments is to be allowed as a deduction under section 57(iii) of the Income-tax Act. In respect of the claim of the assessee with regard to capitalization of interest on borrowings as part of cost of acquisition of shares, reliance was placed on the decision of Mumbai Tribunal in Macintosh Finance Estates Ltd. v. Addl. CIT [IT Appeal No. 5615 (Mum.) of 2002]. 7. We have heard the rival submissions and perused the records. Under Chapter IV of the Income-tax Act, heads of income are provided as enumerated in section 14 of the Income-tax Act. Section 14 of the Income-tax Act provides the heads of income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith retrospective effect from 1-4-1962 provides for disallowance of expenditure in relation to income which does not form part of total income. In view of the provisions of section 14A, while allowing the claim of the expenditure, it is to be seen whether the aforesaid expenditure is relatable to any income forming part of total income assessable in the hands of the assessee. 10. By virtue of insertion of section 10(33) with effect from 1-4-1998 by Finance Act, 1997 dividend income received by the assessee became exempt. During the year under consideration, the assessee had claimed the interest paid on the borrowed funds as a deduction though the dividend income was exempt. The issue before us was considered at length by the Ahmedabad Bench of Tribunal in Harish Krishnakant Bhatt v. ITO [2004] 91 ITD 311 (relied on by Learned AR for the assessee). The Tribunal after considering the issue of the dividend not being taxable and the insertion of the provision of section 14A had held as under : "There was no dispute that the interest payment in the instant case, was an expenditure incurred for making or earning income from dividend. In view of the provisions of section 10(33), there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the company is not the tax paid or payable by the assessee shareholder." The Ahmedabad Bench of Tribunal 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." The issue of allowability of expenditure in past was also considered by Ahmedabad Bench of Tribunal and it was held as under : ". . . . The second issue made out by the assessee was that when the shares were purchased and the assessee incurred liability to pay interest, the dividend was forming part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the provisions of the Act. The assessee has also utilized part of the borrowings raised during the year for investment made in units of growth fund. The claim being of investment in growth plan, no income from which is received from year-to-year and the annual accretions are added to the NAV of the growth fund without any distribution of income which is taxable in the hands of the assessee-company for the year under consideration. In view of the facts that the income from such investments is not amenable to tax, the interest on such borrowings utilized for making investments in the units of the growth fund is not allowable as an expenditure in view of the provisions of section 14A of the I.T. Act. 11. The alternate claim of the assessee to allow the interest paid on borrowings for investment in shares as part of its cost of acquisition has also been considered and deliberated upon by the Ahmedabad Bench and it is held as under : ". . . The expenditure of interest on borrowed capital up to the date of sale or up to the date of purchase of shares could at best be said to be capital expenditure and could be allowed as a deduction while computing the income from capital gains in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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