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TMI Blog2008 (10) TMI 383X X X X Extracts X X X X X X X X Extracts X X X X ..... res?" as well as to dispose of the appeal on merits. 2. Subsequently, the Hon'ble President vide order dated 17-10-2007 has directed the Bench to dispose of the following appeals also : Sr. No. ITA No. Appellant Respondent State 1. ITA No. M/s. ITO, Ward 3(3), Delhi 183/Delhi/2005 Cheminvest New Delhi Ltd., New Delhi 2. ITA No. 2048/ M/s. DCIT, Circle Delhi Delhi/2005 Cheminvest 3(1), New Delhi Ltd., New Delhi 3. ITA No. 1372/ M/s. Maxopp ACIT, Circle 6(1), Delhi Delhi/2005 Investment Ltd. New Delhi 3. The facts in the case of M/s. Daga Capital Management Pvt. Ltd. are hereby narrated. The assessee-company was engaged in the business of dealing in shares in the year under consideration which declared loss of Rs. 12,87,780. It was noted by the Assessing Officer that assessee had claimed expenditure by way of interest amounting to Rs. 9,58,325 on borrowed funds while computing the income as well as the losses incurred in dealing in shares and securities amounting to Rs. 2,86,240. It was also noted by him, that assessee had received dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be drawn merely from the fact that investments in the shares and securities was shown in the Balance Sheet under the head 'Investments', (iii) the Assessing Officer himself had accepted the loss in the share dealing amounting to Rs. 2,86,240, (iv) the assessee had always shown the business profit and never claimed as capital receipts either on long-term or on short-term basis. In view of the same, it was claimed that interest payment was allowable under section 36(1)(iii) of the Act and consequently no part of it can be disallowed under section 14A of the Act. 5. The learned CIT(A) held that the assessee was dealer in shares and securities considering (i) the object stated in Memorandum of Association, (ii) the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 wherein it has been held that entries made in the books of account is not determinative of the nature of the transaction, (iii) the fact that Assessing Officer himself accepted the fact of share trading and the loss arising therefrom. Accordingly, it was further held, that interest paid on money borrowed was allowable deduction under section 36(1)(iii) of the Act. How ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivity of the company was to make investments in holding company for retaining control over the group companies, the disallowance under section 14A can be made irrespective of the fact that dividend earnings were only incidental in nature. On the other hand, the assessee had relied on the decision of Delhi Bench of the Tribunal in the case of Vidyut Investments v. ITO [2006] 10 SOT 284 wherein it was held that when shares are held as stock-in-trade with the object of trading in shares, and dividend income earning was only incidental in nature no part of the expenses could be disallowed under section 14A of the Act. In view of such difference of opinion, the Bench recommended the constitution of a Special Bench to decide the question mentioned in para 1 above. It is in the above circumstances that Hon'ble President has constituted the Special Bench to decide the said question as well as to dispose of the appeal. 7. The facts relating to the appeals of M/s. Cheminvest Ltd., New Delhi, are these. The assessee is an investment company engaged in the business of dealing in shares and securities as noted by the Assessing Officer at page1 of the assessment order. In assessment year 2001 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer applied the provisions of section 14A of the Act and made disallowance of Rs. 67,74,175 on pro rata basis. Finally, the total income was determined at Rs. 1,41,69,420. On appeal, the learned CIT(A) upheld the action of the Assessing Officer under section 14A of the Act. Aggrieved by the same, the assessee is in appeal before the Tribunal. 9. The learned Departmental Representative initially invited our attention to the Memorandum explaining the provisions in the Finance Bill, 2001 by which section 14A was proposed to be inserted in the Income-tax Act, 1961 ('the Act') to indicate that the intention of the Legislature was to allow the expenditure to the extent they are relatable to earning of taxable income. Then it was submitted by him that provisions of section 14A was inserted in the Act by way of abundant caution in lieu of the law already existed. Thus, it was pleaded that purposive construction should be applied which is also known as 'mischief rule' as described in Heydon's case. Thus, four aspects should be taken into consideration while applying such principle i.e., ( i) what was the law before making of the Act; (ii ) what was the mischief or defect f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 57 of the Act, it would still be disallowable under section 14A of the Act if it is found that expenditure related to the income which does not form part of the total income. (b)that expression 'in relation to' used by the Legislature in section 14A is of the widest amplitude and is much wider and broader than the other expressions 'attributable to' and 'derived from'. The Legislature was aware of the other expressions and deliberately ignored the same and used the wider expression 'in relation to'. Therefore, such expression neither can be interpreted in a narrower sense nor the same can be read down since the power of reading down the Statute is available only to the High Courts and Supreme Court of India. Since the expression 'in relation to' has been used in the widest sense, it must mean both the direct and indirect, related, associated, having some connection which is either proximate or distant but not remote and not the strict test of Causa Causans which means immediate and effective source. In support of this proposition, reliance has been placed on the decision of the Hon'ble Supreme Court in the case of Doypack Systems (P.) Ltd. v. Union of India [1988] 2 SCC 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Estates (P.) Ltd. [ITA No. 5615/Mum./2002]. (f )that the decision of the Tribunal in the case of S.G. Invest- ments and Industries Ltd. reported in 89 ITD 44 (Cal.) is an authority for the proposition that the words used in section 14A are wider than, the words used in section 57(iii) and consequently the expenditure in relation to exempted income has to be disallowed even though such expenditure may be allowable in other sections. Reference is also made to other decisions of the Tribunal namely, K.V. Trading Company [ITA No. 924 of 2003 (Cal.)]. (g)that the provisions of sub-sections (2) and (3) of section 14A are merely procedural and clarificatory in nature and therefore, would apply with retrospective effect. Reliance is placed on the various decisions of the Tribunal, namely, Mohanlal M. Shah v. Dy. CIT reported in 111 TTJ 886 (Mum.), ACIT v. City Corp. Finance India Ltd. reported in 108 ITD 457 (Mum.), DCIT v. Seksaria Biswan Sugar Factory Ltd. reported in 14 SOT 66 (Mum.), DCIT v. Smita Conductors Ltd. reported in 16 SOT 251 (Mum.) and ITO v. Rhino Bags (P.) Ltd. reported in 12 SOT 571 (Mum.). The decision of the Special Bench in the case of Acquarius Travels Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is quite different from the language used in section 14A of the Act and therefore those decisions cannot be considered in interpreting the provisions of section 14A. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of Baroda Distributors Pvt. Ltd. 155 ITR 120 wherein it was observed "It is most unsafe to try to arrive at the true meaning of a statutory provision by reference to an interpretation, which might have been placed on an earlier statutory provision which is not only couched different language but is also structurally different." In view of these observations, it has been submitted that the judgment of Hon'ble Bombay High Court in the case of Emrald Company Ltd. 284 ITR 586 and the decision of the Tribunal in the case of Claridges Investment and Finance Pvt. Ltd. 18 SOT 390 would not help the case of the assessee." 12. Mr. Vipul Joshi, learned counsel for the assessee, has submitted before us that the question referred to the Special Bench is in a narrow compass and method of apportionment of disallowance would apply only if the question is answered against the assessee. He has raised various submissions in support of the proposition that in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , if any, with the dividend income is only incidental one. Consequently, no disallowance can be made in such cases merely because the assessee has earned some dividend income in a casual manner. He also relied on the decisions of the Hon'ble Bombay High Court in the case of CIT v. Emrald Co. Ltd. [2006] 284 ITR 586 as well as in the case of CIT v. General Insurance Corpn. of India (No. 1) [2002] 254 ITR 203 wherein it has been held that in the case of dealer in shares the expenditure is incurred in relation to the profits on the sale of shares and not with reference to the dividend income. 13. The learned Counsel, Mr. K.C. Patel, has appeared on behalf of the intervener i.e., Mandalia Group. He took us through the circulars issued by the CBDT to clarify the scope of section 14A. Then it has been pointed out that the disallowance, if any, has to be made in accordance with the prescribed manner. He drew our attention to rule 8B which has been inserted by Income-tax (Fifth Amendment) Rules, 2008. According to him, a formula has been prescribed in sub-rule (2)(ii) i.e., the expenditure incurred by way of interest multiplied by value of investment and divided by the value of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gal contention of the learned Sr. D.R. that provisions of section 14A of the Act has overriding effect over the other computational provisions relating to other heads. However, it has been submitted that on the facts of the case, no disallowance can be made in the cases of above assessees. It has been submitted that both these assessees are promoters of Max India Ltd. engaged in diverse business activities which are also listed in the Stock Exchange. It is further submitted that both the assessees are engaged in the business of holding investments in shares of listed companies, namely, Max India Ltd. and Gaylord Impex Ltd. as well as other companies which are not listed. Our attention was drawn to page Nos. 140 to 142 to point out that investment in shares of Max India Ltd. and Gaylord Impex Ltd. are shown as investment in quoted shares while investments in the shares of other companies are shown as investments in unquoted shares. It is further pointed out that quoted shares are held as trading assets i.e., stock-in-trade while the unquoted shares are shown as capital assets. The investments in quoted shares have been made with a view to have controlling interest in those companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her Ltd. [2006] 101 TTJ (Delhi) 369 and Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 (Delhi). However, it was submitted that it is the intention/motive of the assessee at the time when the expenditure is incurred which is relevant for establishing the dominant and immediate connection between the expenditure incurred and the income earned by the assessee. If the earning of tax free income is merely incidental then it cannot be said that dominant and immediate connection existed between the expenditure incurred and the earning of tax free dividend income. According to him, in the case of these assessees, there cannot be any motive/intention to earn the dividend income since the dominant motive/intention is to earn the taxable income on the sale of shares. Reliance has been placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Sutlej Cotton Mills [1975] 100 ITR 706 and the decision of the Hon'ble Bombay High Court in the case of CIT v. Tata Chemicals Ltd. [2002] 256 ITR 395 . Proceeding further it was also submitted that if the dividend arises or accrues to the assessee in the course of its business activities then the nature of dividend would continue to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001." 18. The scheme of the Act shows that total income of assessee is to be computed under various heads of income specified in section 14. The provisions for computation of income under various heads are provided in sections 15 to 57 of the Act. The Legislature in its wisdom thought that expenditure in relation to income exempted from taxation should not be allowed deduction while comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving a reference to. 20. It is the settled legal position that if a word or an expression has been judicially defined by the court then it should be presumed that the Legislature was well aware of such meaning while enacting an enactment and consequently, such word or expression in the enactment should be understood in the same sense in which it was judicially defined. Reference can be made to the decision of the Hon'ble Supreme Court in the case of Ahmed G.H. Ariff v. CWT [1970] 76 ITR 471 wherein it was observed as under: "It is well-settled that where the Legislature uses a legal term which has received judicial interpretation, the courts must assume that the term has been used in the sense in which it has been judicially interpreted." Similar view was taken by the Apex Court in the case of Keshavji Ravji & Co. v. CIT [1990] 183 ITR 1 by observing as under: "When words acquire a particular meaning or sense because of their authoritative construction by superior courts, they are presumed to have been used in the same sense when used in a subsequent legislation in the same or similar context." 21. In view of the above legal position, it is held that the expression 'in relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mainly with a view to earn the tax-free income then it can be said, that the dominant and immediate connection exists between the expenditure incurred and in the tax-free income and consequently disallowance under section 14A can be made even though some taxable income may arise incidentally. 24. However, there may also be cases where the expenditure may be incurred with a view to earn tax-free as well as taxable income simultaneously from an indivisible activity. Reference can be made to the decision of Hon'ble Supreme Court in the case of Maharashtra Sugar Mills. Ltd. (supra) where the assessee was carrying on the composite business of growing sugarcane and manufacturing sugar therefrom. The assessee claimed deduction in respect of managing agency commission paid by it but the Assessing Officer partly disallowed the same on the ground that part of such expenditure related to management of sugarcane cultivation income from which was exempt from tax. However the Supreme Court held that there is no basis for the view that the only expenditure incurred in respect of a business activity giving rise to taxable income can be allowed as deduction under section 10(2)(xv) and not otherwis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the Act. 26. However, on facts, there may be instances where even a dealer in shares may choose to acquire shares with the main object of earning dividend income. In various cases, it has been seen that the shares/securities are purchased only with a view to earn dividend income despite knowing well in advance that there would be loss on the sale of such shares/securities, for example, Unit Trust of India usually notifies a date for declaration of dividend. In such cases, market price of units rises abnormally before the notified date and falls also abnormally after the notified date. Even in such situation, the assessee buys units at a high price before the notified date, receives the tax free dividend and then sells the units shortly thereafter at a loss. Reference can be made to the case of Walfort Shares & Stock Brokers Ltd. v. ITO [2005] 96 ITD 1 (Mum.) (SB) where such facts existed. The dividend income earned is exempt from tax while the loss is the business loss which gets adjusted against other business profits. In such cases, it cannot be said that dominant and immediate object is to earn profit on sale of securities. On the other hand, the dominant and immediate obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts of the case. If the Assessing Officer finds that there is dominant and immediate connection between the expenditure incurred and the income not forming part of the total income then only the provisions of sub-sections (2) and (3) would come into play and not otherwise. We hold accordingly. 28. In view of the above discussion, it is held that in case of dealer in shares no disallowance under section 14A of the Act can be made merely because some dividend is received incidentally unless it is established that there was dominant and immediate connection between the acquisition of shares and the earning of dividend income. Consequently, the referred question is answered in negative and in favour of the assessee. 29. Coming to the merits of the appeal in the case of Daga Capital Management Pvt. Ltd., we find that assessee was engaged in the business of purchase and sale of shares and securities which is also apparent from the fact that Assessing Officer himself has accepted the loss of Rs. 2,86,240 incurred in dealing of shares and securities. There is nothing on record to suggest that there was any dominant and immediate connection between the borrowed funds for acquisition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... controlling interest in these two companies. Such plea was never raised either before the Assessing Officer or the learned CIT(A). The only explanation before the lower authorities was that assessee was an investment company engaged in the business of dealing in shares and securities. We have also gone through the Memorandum of Association of M/s. Cheminvest Ltd. The object clause permits the assessee to carry on the business of an investment company and to buy, underwrite, invest in, acquire, hold and deal in shares, stocks, debentures, etc. This also suggests that assessee was authorised to carry on the business as an investment company. The mere fact that the assessee was one of the promoters of the above two companies, would not lead to the conclusion that the only purpose for acquiring the shares was to have controlling interest. There is nothing on record to hold that investment in shares of these two companies was made with a view to have controlling interest. It was merely a case of making investment by an investment company in pursuance of its objects. Acquisition of controlling interest normally is on capital account. It is also not the business of the assessees to take o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on regular basis. Since the intention of the assessee is not to sell the shares of these companies in the near future, in our opinion, it cannot be said that there is any dominant and immediate connection between the interest paid and the taxable profits on the sale of shares. The chart given above reveals that only one transaction of insignificant quantity of shares was made. On the other hand, the enormous dividend income has been accrued and received by the assessee every year. In the case of investment companies, the main purpose of investment is to earn the maximum dividend income. There is no other motive or intention in case of investment companies. Therefore, we are of the view that there did not exist any dominant and immediate connection between the interest paid and the taxable income. In fact, such connection existed between interest paid and the dividend income since the only motive/object was to earn the dividend income as is apparent from the amount of dividend received. Therefore, in our view, the disallowance under section 14A was justified. The orders of the learned CIT(A) in both the cases are therefore upheld. 34. In the result, the appeal of the revenue in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before 1-4-2001.]" 4. This section has been inserted by the Finance Act, 2001 with retrospective effect from 1-4-1962. At th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the agreement entered into between the assessee-company and the managing agents. The managing agents were entitled to commission at Rs. 4.86 lakhs which was claimed as deduction. The Income-tax Officer disallowed a sum of Rs. 1.26 lakhs on the ground that the same related to the commission of the managing agents for managing the sugarcane cultivation part of the business. The Tribunal as well as High Court deleted the addition by observing that it was one single indivisible business. The Hon'ble Supreme Court observed that the entire managing agency commission was expended for the purpose of the business carried on by the assessee and was allowable in entirety notwithstanding the fact that the income from a part of that business was not exigible to tax. 8. Similar facts came up for consideration before the Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corpn. (supra). In this case the assessee was a State Government Corporation who derived its income from interest, letting out of warehouse and administration charges for procurement of foodgrains. It claimed deduction of expenditure amounting to Rs. 38.13 lakhs under section 37 of the Act. The Income-tax Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n.'s case (supra) that if the two businesses producing taxable and exempt income can be bifurcated and do not constitute one indivisible business, then the apportionment of expenditure is permissible, but if the entire business was composite and indivisible, then no disallowance of the expenditure relatable to the exempt business could be made. 10. It was pursuant to the judgment in Rajasthan State Warehousing Corpn.'s case (supra) rendered on 23-2-2000 and other judgments laying down the same ratio decidendi that the Legislature inserted section 14A by the Finance Act, 2001, with retrospective effect from 1-4-1962. At this juncture it would be appropriate to note down the intention behind the insertion of this section which is coming up from the Memorandum explaining the provision in the Finance Bill, 2001 [248 ITR (St.) 195], 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 ince ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in relation to income which does not form part of the total income under the Income-tax Act. 25.3 It is also being clarified that the assessments where the proceedings have become final before 1-4-2001 should not be reopened under section 147 of the Act to disallow expenditure relatable to the exempt income by applying the provisions of section 14A of the Act. 25.4 This amendment takes effect retrospectively from 1-4-1962, and accordingly, applies in relation to the assessment year 1962-63 and subsequent assessment years." 12. On a cursory look at the Memorandum explaining the provision in the Finance Bill as well as the aforenoted Circular, it becomes abundantly clear that the Legislature clarified its intention that no deduction is allowable in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. It has further been made clear that the purpose of insertion of section 14A is not to make any disallowance of expenditure in relation to the exempt income for the first time, but it was always the intention of the Act for not allowing such deductions and this insertion was made only to cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.1 The learned Counsel for the assessee contended that section 14A would have no application to income chargeable under the head "Business income". He submitted that the disallowance of interest has been wrongly made by considering the applicability of section 14A, whereas the correct section allowing deduction is 36(1)(iii) as per which the amount of interest paid in respect of capital borrowed for the purposes of business or profession is to be allowed as deduction. The learned A.R. further submitted that though the dividend income falls under the head 'Income from other sources', but in view of the fact that the shares were held as stock-in-trade, such income would also be considered as 'Business income' and not 'Income from other sources'. He relied on the judgment of the Hon'ble Delhi High Court in the case of CIT v. Excellent Commercial Enterprises & Investments Ltd. [2006] 282 ITR 423 , which in turn has followed the judgmemt of the Hon'ble Supreme Court in the case of Cocanada Radhaswami Bank Ltd. (supra) for contending that the dividend earned by an assessee from shares held as stock-in-trade is to be treated as business income. Once the dividend income is held to be fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputing the total income under this Chapter". It, therefore, emerges that section 14A has been inserted to have applicability over all the heads of income. The residence of this section in the first sub-chapter, viz., "Heads of income", clearly demonstrates that it has been made applicable to all the head of income. If the intention of the Legislature had been to restrict its application to the expenditure under the heads other than "business income", then it would have been placed under the relevant sub-chapter instead of the first sub-chapter, which, in turn, refers to all the heads of income. We, therefore, hold that the expenses deductible under the head 'Business income' are not immune from section 14A and this section has full application over all the heads of income. In other words if any expenditure is found to have been claimed as deduction under any of the heads of income in relation to income which does not form part of the total income under this Act, that will fall in the consideration zone of section 14A for disallowance. 17.5 The learned A.R. has argued that section 36(1)(iii) is a complete code in itself and the amount of interest paid in respect of capital borrowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not derogate from special. In other words, it implies that the special provisions override the general provision. If there are two conflicting provisions in the same section or clause, the special provision will prevail as the same is excluded from the general provision. To put it still differently, if a specific provision is made on a certain subject-matter, that matter is excluded from the general provision. The Hon'ble jurisdictional High Court in the case of Forbes Forbes Campbell & Co. Ltd. v. CIT [1994] 206 ITR 495 (Bom.) has quoted this maxim with approval. This maxim has also been applied by the Hon'ble Madras High Court in the case of CIT v. Copes Vulcen Inc. [1987] 167 ITR 884 , in which case it was held that section 9(1)(i) is general in nature and section 9(1)(vii) refers to a particular type of income and is a special provision dealing with even for technical services rendered by the foreign company. After considering the arguments from both sides it was held that section 9(1)(vii) would apply. Turning to the facts of our case, we observe that the deductibility of interest is covered by the general provision of section 36(1)(iii). On the other hand, section 14A is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 14A in an earlier part of this order, which were inserted by the Finance Act, 2006 with effect from 1-4-2007. The issue of their prospective or retrospective applicability has been hotly argued before us. Whereas the assessee is claiming that these sub-sections were inserted with effect from 1-4-2007 and hence will not be applicable to the assessment year in question, the learned D.R. has opposed the assessee's contention by submitting that these sub-sections are merely clarificatory in nature and provide the procedure for computing the disallowance of the expenditure and hence should be considered as retrospectively inserted. 18.2 In order to properly appreciate the present controversy, it would be relevant to consider the intention behind the insertion of these sub-sections, coming out from Memorandum explaining the provisions in the Finance Bill, 2006, as under :- "Method for allocating expenditure in relation to exempt income- Under the existing provisions of section 14A, it has been provided that for the purpose of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, clarificatory or declaratory provision is always considered as retrospective and presumed to be applicable to the period anterior as well as posterior to the amendment. This view has been taken by the Hon'ble Supreme Court in several judgments including H.H. Sir Rama Varma v. CIT [1994] 205 ITR 433 and CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625. Similar view has been reiterated in CIT v. Shelly Products [2003] 261 ITR 367 (SC) in which it has been held that the clarifactory provision inserted to clarify the law so as to remove the doubt, is retrospective even if it is stated to be applicable from a particular assessment year. 18.4 The learned Counsel for the assessee has strongly relied on the judgment of the Hon'ble Supreme Court in the case of Virtual Soft Systems Ltd. v. CIT [2007] 289 ITR 83 in which it was held that the Explanation 4 to section 271(1)(c) has been substituted by the Finance Act, 2002 with effect from 1-4-2003 so as to impose penalty under the section even if the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 40(b) is declaratory in nature and is available for the period interior to 1-4-1985. Similar view was reiterated by the Hon'ble Apex Court in the case of Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753 . However certain contrary observations were made in the case of Rashik Lal & Co. v. CIT [1998] 229 ITR 458 (SC) as to the operation of Explanation 2. Again the matter was considered by the Hon'ble Supreme Court in CIT v. Kanji Shivji & Co. [2000] 242 ITR 124 in which all the earlier three judgments were considered. It was finally held that Explanation 2 to section 40(b) is declaratory and hence retrospective in operation. The observations in the case of Rashik Lal & Co. (supra) appearing to be not in consonance with the view taken in the case of Brij Mohan Das Laxman Das (supra), were held to be obiter. 18.6 From the above discussion, it is amply clear that the general rule is that a provision is normally prospective unless it is given retrospective operation expressly or can be so inferred by necessary implication. This rule is true in case of substantive provisions. But when the clarificatory or explanatory or procedural provision is under consideration, the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worked out 'in accordance with such method as may be prescribed'. The method for such computation has been, in turn, prescribed in rule 8D. On going through these two sub-sections, it is clearly noticed that the purpose of these two sub-sections is to determine the amount of expenditure incurred in relation to the exempt income. We are unable to find out any substantive liability imposed by the Legislature through these sub-sections (2) and (3). These sub-sections simply lay down the procedure and mechanism for working out the expenditure in relation to income which is exempt from tax. Rule 8D has been enshrined to the Income-tax Rules, 1962 which prescribes the method by which the Assessing Officer has to determine the disallowable expenditure as relatable to the exempt income in terms of sub-sections (2) and (3). Further when sub-section (1) itself is clarificatory and then resultantly retrospective, it is beyond our comprehension as to how sub-sections (2) and (3), providing the mechanism to do what is provided in sub-section (1), can be construed as substantive and hence prospective. At the same time, it is significant to mention that a proviso has also been inserted to sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t income then the disallowance is rightly called for under section 14A. If however it is for earning taxable income then no disallowance can be made, even if the assessee had incidentally earned some income which is exempt from tax. The learned A.R. relied on the judgment of the Hon'ble Supreme Court in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior (supra ) for contending that the expression "in relation to" as used in section 14A should be considered to mean having "a dominant and immediate connection with the subject and any indirect connection was ruled out". In the light of this judgment it was stated that section 14A contemplated the making of disallowance of only such expenditure, the dominant object of whose spending was, to earn exempt income. If the dominant and immediate object of the expenditure is not to earn the exempt income, the learned A.R. submitted that the same would go out of the purview of section 14A. It was further contended that even where the exempt income earned by the assessee was the main source and not incidental, in those cases also the Assessing Authority is not obliged to make any disallowance of any indirect expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the expenditure in relation to the exempt income and not to examine whether the expenditure incurred by the assessee has resulted into exempt income or taxable income. If the view point of the learned A.R. is accepted then it would mean putting the cart in front of the horse and redrafting sub-section (1) of section 14A. On going through sub-section (1), it can be clearly noticed that the exercise of making disallowance starts with firstly tracing out the exempt income and then initiating the process of working out the expenditure incurred in relation to such exempt income. It is clearly borne out from rule 8D as has been discussed infra that it has three clauses of sub-rule (2), being the expenditure directly relating to the exempt income as per clause (i); expenditure by way of interest which is not directly attributable to particular income as per clause (ii); and an amount equal to one half per cent of the average of the value of investment as per clause (iii). The sum total of these three amounts is the amount disallowable under section 14A. From here it clearly emerges that stipulation of section is to compute the amount of expenditure which is not allowable under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 366(22). In that context the expression "relating to" came up for consideration when the Union of India contended that the jurisdiction of the Court was barred as the dispute relating to enforcement interpretation or approach of any treaty etc., was barred from the Court's jurisdiction. After examining the issue in detail, the Hon'ble Supreme Court, by the majority judgment, came to conclusion that the expression "relating to" should mean a direct and immediate connection with the subject-matter. It was, therefore, held that the Court had jurisdiction to examine Articles 291, 362 and 366(22) insofar as the dispute in question was concerned. 23.3 The facts in the case of Doypack Systems (P.) Ltd. (supra), relied upon by the learned D.R. are that the Swadeshi Cotton Mills Co. Ltd. (Acquisition and Transfer of Undertakings) Act, 1986 was enacted with a view to effect acquisition and transfer of certain textile undertakings of the Swadeshi Cotton Mills Co. Ltd. and securing of such maintenance undertakings so as to subserve the interest of the general public by ensuring the continued manufacture, production and distribution of different varieties of cloth and yarn. As per section 3 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... giving meaning to a particular word in one section, there is no authority for importing and adopting the meaning of that word in some other parts of the same Act or in a different enactment. 23.5 With this background in mind, we go to the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior (supra) relied upon by the learned A.R. for canvassing his point that the expression 'in relation to' as used in section 14A should be used in a narrow sense. From the narration of the facts of this case, it is observed that the expression "relating to" discussed in this case has been used by the Hon'ble Supreme Court in the context of examining whether it had jurisdiction in a dispute in respect of any right accruing under or any liability or obligation arising out of any of the provisions of this Constitution relating to any such treaty, etc. It was only in this context that the Hon'ble Supreme Court held that the jurisdiction vests in it because the expression 'relating to' necessarily means that there should be direct and proximate connection. Thus, it is clear that the context in which the expression 'relating to' was interpreted by the Hon'ble Supreme Court did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, it is clearly borne out that these are not used interchangeably. The Legislature is fully conscious of employment of appropriate expression depending upon its intent of expanding or contracting the scope of the section. Wherever it intends to give a wider meaning, it uses the phrase like "in relation to" or "attributable to" etc. However, where the scope is to be restricted, it uses the suitable phrase such as "directly relatable to" or "wholly and exclusively for the purposes of", which narrows its ambit. We have noted above that the meaning of a word or phrase can be viewed only in reference to the context in which it is used. There is no need to wander here and there in search of the meaning of the expression 'in relation to' as used in sub-section (1) because the same has been explained in sub-section (2) itself. Whereas sub-section states that no deduction shall be allowed in respect of "expenditure incurred by the assessee 'in relation to' income which does not form part of the total income", sub-section (2) provides the meaning of the same expression that is "expenditure incurred 'in relation to' such income which does not form part of the total income" to mean t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii)an amount equal to one half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. 3. For the purposes of this rule, the 'total assets' shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets." 23.7 On going through the contents of rule 8D, it becomes amply clear that not only the expenditure directly relating to exempt income [Sub-rule 2(i) of rule 8D] but also the indirect expenditure like interest which is not directly attributable to any particular income or receipt [Sub-rule 2(ii)] and then further one half per cent of the value of investment to cover up incidental indirect expenses [Sub-rule 2(iii)] have been categorized as expenditure incurred in relation to exempt income. We do not have even an iota of doubt in our mind that the intention behind using the expressi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of investment". On this analogy it was urged that section 14A along with this rule cannot have any application where the shares are held as stock-in-trade. The sum and substance of his submissions was that this section would apply only when the shares are held as 'Investment'. We are not impressed with this submission raised on behalf of the assessee for the out-and-out reason that the reference in this rule is to the 'value of investment' and not the assets 'held as investment'. A person may make investment in shares and the shares so purchased may be held either as "Stock-in-trade' or 'Investment'. The word "investment" in this rule refers to the making of purchase of shares and not holding it as investment. 23.10 The learned A.R. has relied of certain judgments including that of the Hon'ble jurisdictional High Court in the case of Emrald Co. Ltd. (supra), in which it was held that the interest on borrowing and other expenditure incurred in the course of share trading activity are allowable as deduction while computing the business income and hence these cannot again be deducted from the dividend income for the purposes of computing deduction under section 80M. Based on this jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two things are noticeable viz., first the onus to prove that the expenditure was incurred in the taxable business operations and not the exempt income is upon the assessee and secondly, the apportionment of the expenses is permissible for making disallowance under section 14A. No contrary judgment of any other High Court on this point has been pointed out. In the light of the fact that there is a cleavage of opinion amongst the Benches of the Tribunal and there is no other judgment either of the Hon'ble Supreme Court or of any other High Court, this judgment of the Hon'ble Punjab & Haryana High Court appeals to us. Be that as it may, in our considered opinion, the discussion about the apportionment of direct or indirect expenditure towards taxable and exempt income has become academic in view of rule 8D which prescribes mechanism for working out the disallowance under section 14A. In this scenario, the further question as raised by the parties about the onus on the Assessing Officer or the assessee for bringing a particular amount of expenditure in the purview of section 14A and the manner of computation of disallowance has ceased to be of any relevance since the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sense that if there is any exempt income, the disallowance of the expenditure under section 14A in relation to such income has to automatically follow. There is absolutely no indication much less the reference in the language of section that could even remotely suggest that the disallowance is not contemplated in respect of incidental income, which is otherwise exempt from tax in the same manner as is the main income. 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 section 14A will be defeated. 25. It was further argued on behalf of the assessee that the interpretation sought to be given by the learned D.R. to section 14A, if accepted would be very harsh and unequitable as it will result in disallowance of expenditure whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court in several cases including Federation of Andhra Pradesh Chambers of Commerce & Industry v. State of Andhra Pradesh [2001] 247 ITR 36 . In Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 (SC) also it was held that 'while interpreting a statute legislative intention must be found in the words used by the Legislature itself; legislative casus omissus cannot be supplied interpretative process except in case of clear necessity and when reason for it is found in the four corners of the statute itself'. Coming back to our case, we note that sub-section (1) of section 14A provides in unequivocal terms for not allowing deduction in respect of expenditure incurred by the assessee in relation to exempt income and sub-section (2) lays down the mechanism for determining such amount of expenditure incurred in relation to the exempt income in accordance with the method as prescribed under rule 8D. There is hardly anything to infer, that the Legislature intended to immune the expenditure in relation to incidental exempt income from the operation of section 14A. There is no exception for not considering any income which is exempt from tax, be it the main or incidental. We, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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