9911796707
TMI Blog2012 (12) TMI 288X X X X Extracts X X X X X X X X Extracts X X X X ..... not for earning any exempt income. 1.3 That the CIT(A) further failed to appreciate that the provisions of section 14A were, even otherwise, not applicable since no exempt income (dividend income) was actually earned by the appellant during the year under consideration. 2. Without prejudice, that on facts and circumstances of the case, the CIT(A) erred in confirming the entire disallowance of Rs. 8,52,43,836/- made by the Assessing Officer u/s 14A of the Act. 2.1 That the CIT(A) failed to appreciate that expenses incurred for earning interest income assessed as business income and also for maintaining the corporate identity of the appellant were, even otherwise, allowable under the provisions of the Act. 2.2 Without prejudice, that the CIT(A) further failed to appreciate that disallowance, if at all, should have been computed as per the formulae prescribed in Rule 8D(2)(iii) of the Income Tax Rules. The appellant craves leave to add, amend, alter or vary from the above grounds of appeal before or at the time of hearing." 2. Facts, in brief, as per relevant orders are that e-return declaring nil income filed on 30.11.2006 by the assessee, was sele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties of investments analyses data - financial and otherwise, meet with persons in the cement and other related industry to ascertain opportunities, prepare reports for review, etc. These activities are normal business activities in connection with any investment to be undertaken whether by an assessee company such as ours or even if it was by any other assessee company engaged in the manufacturing or services activity. All such activities would require the assessee company to incur expenses which are in connection with its business activities. The assessee company has also incurred the expenses in the course of its normal business activities. Needless to mention, the investments as made by the assessee company are substantial investments and in common parlance would be regarded as "big-ticket" investments. It is natural that making of such substantial investments are preceded by appropriate data gathering, data analysis,, ascertainment of risks and other related matters, discussions to understand the environment relating to potential opportunities and many other similar matters. Post making of the investment it is also necessary for the company to follow up its investment portfoli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad incurred an expenditure of Rs. 103827023/- during the year. Out of the above expenditure in the computation of income the appellant had himself disallowed expenditure relating to stamp duty expenses, provisions for gratuity and depreciation as per the Company's Act, and showed gross total loss of Rs. 85049781/- which is reflected in the order u/s 154 of the Act, dated 05.01.2009 copy of which was filed during the appellate proceedings. The AO has disallowed the expenditure of Rs. 103827023/-under the provisions of section 14A of the Act, and the assessable income was computed at 194055/- in the order u/s 154 The main contention of the appellant is that since no dividend income/ exempt income was received during the year, therefore, the disallowance made by the AO was not as per law. It has been submitted that the provisions of section 14A would apply only if any exempt income was received by the appellant during the relevant previous year which is not includable in the total taxable income, and since no such income was received during the year, therefore, no disallowance of expenditure could be made by the AO. Section 14A of the 1.1. Act reads as under: "14A. Expenditure incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as investment is not allowable whether or not there is any yield of dividend. The term 'expenditure incurred in relation to income' used in section 14A is still wider than the 'expenditure incurred for the purposes of business'. The Legislature, using the expression 'expenditure in relation to income which does not form part of the total income' in section 14A of the Act, in no way indicates that it does not encompass the disallowance of expenditure incurred in relation to the income in absence of actual receipt of income during the relevant previous year. On the contrary, as stated above, the term 'in relation to' is wide enough to include in its sweep the expenditure both 'for making or earning income' and 'incurred wholly and exclusively for the purposes of business carried on by the assessee'. The object of introducing the provision of this inserted section 14A by the Finance Act, 2001, with retrospective effect from 1-4-1962 was clarified in the provisions as well as in the memorandum explaining the provisions, notes on clauses relating to the Finance Bill, 2001 and in the Board's Circular No. 14 of 2001, dated 22-11-2001 and Circular NO.8 of 2002, dated 27-8-2002 in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome. 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 u/s 14A as is relatable to the exempt income and not in considering all the expenses one by one for ascertaining if either of them have resulted into exempt income and thereafter considering such amount as dlsallowable u/s 14A If this way of interpretation of section 14A as suggested by the Id. AR is accepted, then the method of computing the expenditure as relatable to the exempt income as provided in rule 80, would become meaningless and the words 'in accordance with such method as may be prescribed' in sub-section (2) for determining the amount disallowable would require obliterati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase. Since the entire expenditure is attributable to the earning of exempt income only therefore the action of the Assessing Officer in disallowing the entire expenditure is in order. This ground of appeal is dismissed." 4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. AR on behalf of the assessee while carrying us through the impugned order contended that the assessee was engaged in the business of investment of their funds and acquiring controlling interest in the company. After obtaining the approval of FIPB and RBI , the assessee made investment of Rs. 1850.19 crores in the year under consideration. The only source of income of the assessee was interest from FDRs and no dividend was received during the year. The ld. AR vehemently argued that the expenditure incurred by the company could not be attributed to earning of dividend income. While referring to decision of Hon'ble Supreme Court in CIT v. Distributor (Baroda) (P.) Ltd. [1972] 83 ITR 377 (SC) the ld. AR argued that the expression business has to be understood in the commercial sense as involving any activity designed to earn profit. Inter alia, the ld. AR relied upon de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee carried on the business. Now which activities constituted business, has not been explained before us nor any material was referred to in support. The three words "trade", "commerce" or "business" have been interpreted by the Hon'ble Supreme Court and other courts in their various decisions. The word "trade" was elucidated in the case of State of Punjab v. Bajaj Electricals Ltd. [1968] 2 SCR 536. It has been opined:- "3. The expression "trade" is not defined in the Act. "Trade" in its primary meaning is the exchanging of goods for goods or goods for money; in its secondary meaning it is repeated activity in the nature of business carried on with a profit motive, the activity being manual or mercantile, as distinguished from the liberal arts or learned professions or agriculture. The question whether trade is carried on by a person at a given place must be determined on a consideration of all the circumstances. No test or set of tests which is or are decisive for all cases can be evolved for determining whether a person carries on trade at a particular place. The question, though one of mixed law and fact, must in each case be determined on a consideration of the nature of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Development (P.) Ltd.'s case (supra)]. The third essential characteristic is that a business transaction must be between two persons. Business is not a unilateral act. It is brought about by a transaction between two or more persons. And lastly, the business activity usually involves a twin activity. There is usually an element of reciprocity involved in a business transaction.. In Barendra Prosad Ray v. ITO [1981] 129 ITR 295, the Hon'ble Supreme Court has examined the scope of the term "business" in the general law or in common parlance as well as Indian Partnership Act, 1932 and held as under:- "The expression "business" does not necessarily mean trade or manufacture only. It is being used as including within its scope professions, vocations and callings from a fairly long time. The Shorter Oxford English Dictionary defines "business" as "stated occupation, profession or trade" and "a man of business" is defined as meaning "an attorney" also. In view of the above dictionary meaning of the word " business ", it cannot be said that the definition of business given in s. 45 of the Partnership Act, 1890 (53 & 54 Vic. c. 39), was an extended definition intended for the purpose of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness is normally with the object of making profit. To regard an activity as business, there must be a course of dealings either actually continued or contemplated to be continued with profit motive and not for sport or pleasure. The expression "profit motive" does not postulate or intends that profit must, in fact, be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or a series of transactions. It predicates a motive which pervades the transaction(s) effected by the person in the course of his activity. Thereafter, it was observed as under: "In actual practice, the profit motive may be easily discernible in some transactions: in others it would have to be inferred from a review of the circumstances attendant upon the transaction. For instance, where a person who purchases a commodity in bulk and sells it in retail it may be readily inferred that he has a profit motive in entering into the series of transactions of purchase and sale. A similar inference may be raised where a person manufactures finished goods from raw materials belonging to him or purchased by him, and sells them. But there a person comes to own in the course of hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the context of difference between investment and business, the following observations, are relevant:- "We think that the presence of commercial motive is a primary legal requisite of trade. Purchase and sale as a business deal in the present context may be another requisite. Intention to make a profit normally inspires trade and commerce, but it seems it may not be the essence of trade. Likewise, habitual dealing is ordinarily indicative of trade or commerce, but is not necessarily so, as pointed out by Rowlatt K. in Graham v. Green. There may be other legal requisites which may have to be satisfied with reference to the character of particular transactions in different kinds of trade or businesses. But whether these legal requisites are satisfied or are present will themselves, in their turn, be a mixed question of law and fact. The character of the motive or intention with reference to a transaction is a matter of inference from the other facts. It is here the badges of trade indicated by the Royal Commission earlier referred to are of assistance. The subject-matter of a transaction may by such as is commonly or usually dealt with in trade or commerce." 6.7 Almost identical v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Lord Fisher on earlier authority "that 'business' is or may be in particular contexts a word of very wide meaning," but that "the ordinary meaning of the word 'business' in the context of this Act excludes, in my judgment, any activity which is no more than an activity for pleasure and social enjoyment", though the fact that the pursuit of profit or earnings was not the motive did not prevent an activity from being a business if in any other respect it plainly was. He referred, at p. 245, to six indicia listed by the counsel for the commissioners as the test as to weather an activity was a business- was it- (a) a "serious undertaking earnestly pursued;" (b) pursued with reasonable continuity; (c) substantial in amount; (d) conducted regularly on sound and recognized business principles; (e) predominantly concerned with the making of taxable supplies to consumers for a consideration; (f) such as consisted of taxable supplies of a kind commonly made by those who seek to make profit from them." 6.8 Now adverting to decisions relied upon by the ld. AR. First such decision is Distributor Baroda (P.) Ltd. (supra), where in the issue was as to whether the assessee company ,incorporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore it was concluded that no question of exemption under section 4(3)(vii) of the 1922 Act arose. In Nabadwip Chandra Roy's case (supra) the assessee carried on textile business and in that capacity was nominated as director and Chairman of the Member Society viz. Assam Provincial Textile Cooperative Society as he was the chairman of the Member Society of the Silchar Sub-divisional Co-operative Society. Accordingly, it was concluded that the remuneration therefore which the assessee got for the services rendered as director was nothing but a receipt arising from the exercise of the textile business, vocation or occupation carried on by him. After perusal of all the decisions relied upon by the ld. AR, especially when the said decisions were rendered in altogether different contexts and settings and the ld. AR did not elaborate before us as to how these decisions improve the case of the assessee, we are of the opinion that reliance on these decisions is totally misplaced. In the instant case, the assessee did not place before us even a copy of Memorandum of Association of the company or objects of the company, despite specific request during the course of hearing of the appeal. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in its balance sheet as on 31.3.2006 reflected under schedule IV the amount of Rs. 18,509,150,756/- as long term Investments in unquoted shares. As already observed, the assessee did not furnish any specific details of expenditure incurred for management and supervision of aforesaid huge investments either before the AO or the ld. CIT(A) in order to enable them to record their satisfaction on the claim of the assessee. Now for instance what is the nature of an amount of Rs. 30 lacs towards agreement termination charges debited in P/L account has not been explained either before the lower authorities or even before us. Of course, as per section 14A(2) of the Act, even where the assessee claims that there is no expenditure which had been incurred relating to income which does not form part of his total income, if the AO, 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. The provisions clearly state that when the AO embarks upon such exercise, he must have regard to the accounts of the assessee; he cannot show a blind eye to the picture revealed by the accounts. Hon'ble Apex Court in Kant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001, dated 22-11-2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r decision in CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 have observed that disallowance under section 14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. 7.4 In Cheminvest Ltd. (supra), Special Bench held that when the expenditure is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not and the provisions of sec. 14A of the Act do not envisage any such exception. 7.5 Hon'ble jurisdictional High Court in a recent decision dated 18.11.2011 in Maxopp Investment Ltd. (supra) held as under: "41. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income "in accordance with such method as may be prescribed". Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment." 7.6. Hon'ble Calcutta High Court in Dhanuka & Sons v. CIT held that "After hearing the learned counsel appearing for the parties and after going through the materials on record and the decisions cited by Mr. Khaitan, we find th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity took a most reasonable approach in assessment." 7.7 As already observed, in the instant case, the assessee denied incurring any expenditure for earning income, which did not form part of total income during the course of assessment proceedings even when huge investments were made by the assessee in the shares for having controlling interest . In terms of the aforesaid decision of the Hon'ble jurisdictional High Court in Maxopp Investment Ltd. (supra), even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the AO is required to verify the correctness of such claim. In case, the AO is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the AO has to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act, Hon'ble High Court concluded. Following the view taken in this decision, Hon'ble jurisdictional High Court in CIT v. Machino Plastic Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
