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TMI Blog2007 (5) TMI 557X X X X Extracts X X X X X X X X Extracts X X X X ..... put forward their rival submissions. The brief facts of the case are that the assessee-company is an investment company, which is a non-banking company, as defined by the Reserve Bank of India, and the sources of income are income from interest, dividend and long-term/short-term capital gains on sale of investments. During the year under consideration, the assessee-company had received gross dividend of Rs. 2,679.29 lakhs, which it claimed as exempt under the provisions of section 10(33) of the Income-tax Act. No part of expenditure had been allocated towards the earning of this income. The Assessing Officer invoking the provisions of section 14A requisitioned the assessee-company to explain why the expenditure incurred to earn the income including the interest expenditure should not be disallowed. The assessee in reply submitted as under :"The company had received dividends of Rs. 26,79,28,996 during the assessment year 2000-01, which were exempt from tax under the provisions of section 10(33) of the Income-tax Act, 1961.The company had incurred bank charges of Rs. 602 for the collection of the dividends and hence the net amount of Rs. 26,79,28,394 was the net tax free dividends ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 27 crores. The learned Departmental Representative drew our attention to the reply filed by the assessee before the Assessing Officer, which is incorporated in the assessment order itself and accepting the contention of the assessee expenses worked out by the assessee had been disallowed. The learned Departmental Representative further clarified that as the dividend income was 57.34 per cent. of the total income, proportionate income attributable to earning of income was worked out by the assessee. The Assessing Officer accepted the same disallowed the expenditure. The learned Departmental Representative further submitted that before the Commissioner of Income-tax (Appeals), the same was agitated that salary expenses of Rs. 139.51 lakhs are not to be included. Drawing distinguishment, the learned Departmental Representative stated that the ratio of CIT v. General Insurance Corporation of India (No. 2) [2002] 254 ITR 204 is not applicable to the facts of the present case, as General Insurance Corporation is not an investment company and income of the assessee is that of investment company, which includes 57 per cent. of income from dividend. The learned Departmental Represen-tat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Departmental Representative in rejoinder submitted that in case the expenditure incurred by the assessee is not for the earning of dividend then what is the purpose of expenditure in the case of the assessee-company which is an investment company. 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, which are chargeable to tax while computing the income of the assessee. Separate heads of income have been provided for computing the income under each head independently and separately and the heads of income are as under :A--SalariesB--[ . . .]C--Income from house property D--Profits and gains of business or profession-E--Capital gains-F--Income from other sources Section 14A of the Income-tax Act was inserted by the Finance Act, 2001, with retrospective effect from April 1, 1962, which provided as under :"Section 14A. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... safe custody charges were not directly relatable to earning of dividend for the purpose of computing special deduction under section 80M of the Income-tax Act, 1961."All the other cases relied upon by the assessee in the case of sister concerns of the assessee-company are not relating to the investment company though it has been held that no disallowance by way of estimation of certain expenses is warranted, though the dividend income was exempt and the provisions of section 14A of the Income-tax Act were invoked.Similarly, in the case of Shaw Wallace and Co. Ltd. v. Deputy CIT [2002] 80 ITD 156 (Cal), the issue was computation of deduction under section 80M of the Income-tax Act and it was held as under (headnote) :"Having considered the rival submissions and deliberated upon the judicial precedents on the issue it was to be held that the of expenditure incurred in earning dividend income, merely on notional or estimate basis and for the purpose of comput-ing admissible deduction under section 80M was not sustainable in law. In case an expenditure was really incurred in earning the dividend income, such an expenditure should undoubtedly be deducted from gross dividend to arrive at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR (AT) 112 (Delhi) ; [2006] 101 ITD 151 concluded as under :"The only income arising from the holding of the shares was dividend income which was exempt under section 10(33). The asses-see incurred expenditure for earning exempted dividend income. Section 14A had been inserted by the Finance Act, 2001, with effect from April 1, 1962, laying down that no deduction would be allowed in respect of the expenditure incurred by the assessee in relation to the income, which does not form part of the total income under that head. The assessee was, therefore, not entitled to the said deduction of interest under section 36(1)(iii). The authorities below, therefore, rightly disallowed the amount against the assessee."The present assessee before us is an investment company whose object is to invest its fund in group concerns, income from which is earned by way of dividend income and interest income. The dividend income is exempt from tax under the provisions of section 10(33) of the Income-tax Act. As admitted by the assessee during the course of assessment proceedings 57.34 per cent. of the total income is attributable to dividend income. Accordingly, the assessee had in its reply submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... infra-structure is used for the purpose of attainment of its objects which include investment in group concerns and other companies. The income earned on such investments by way of dividend income is exempt under the provisions of section 10(33) of the Income-tax Act and by invoking the provisions of section 14A of the Income-tax Act, such expenditure attributable to earning of dividend income is to be disallowed under the provisions of the Act. Therefore, we direct the Assessing Officer to disallow the portion of salary expenditure incurred during the year under consideration which in turn has been incurred for the purpose of carrying out the objects of the assessee-company. The assessee is directed to furnish the breakup of salary expenditure incurred during the year under consideration, where services of such employees have been utilized for the purpose of carrying out the objectives of the assessee-company. In case of failure on the part of the assessee to furnish the requisite details, the Assessing Officer is left with no option but to estimate such expenditure which is attributable to earning of dividend income, which in turn can be limited to the extent of percentage of div ..... X X X X Extracts X X X X X X X X Extracts X X X X
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