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TMI Blog2012 (12) TMI 288X X X X Extracts X X X X X X X X Extracts X X X X ..... is payable by the assessee for acquiring those old shares. Proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment - 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 - 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 - restore the matter to the file of the AO for deciding the issue, afresh in accordance with law in the light of our aforesaid observations , after allowing sufficient opportunity to the assessee - In the result, appeal is partly allowed but for statistical purposes. Decision of Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax [2011 (11) TMI 267 - DELHI HIGH COURT] followed. - IT Appeal No. 2628 (Delhi) of 2010 - - - Dated:- 14-9-2012 - Rajpal yadav And A.N. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established pursuant to certain approvals received from the Foreign Investment Promotion Board[FIPB], for making downstream investments into other companies, engaged in cement and related industry. The assessee company was accorded approval on 18.12.2002 by FIPB for non-resident investment in M/s Ambuja Cement Eastern India Ltd., for further downstream investment in the Associated Companies Ltd. and M/s Ambuja Cement India Ltd. The aforesaid approval was accorded for three years, and was renewed on 30.05.2005. In pursuant to the approval granted by FIPB, the assessee company made an investment of Rs. 18,509,150,756/- in purchase of 390,163,637 equity shares of Rs. 10/- each fully paid up at a price of Rs. 47.44 per share in M/s Ambuja Cement India Ltd.. To a query by the AO, the assessee submitted that the assessee made investment in order to obtain controlling interest, management etc. and the expenditure incurred therein was revenue in nature. Since the investment was made only in April, 2005, no income had been declared. For the year under consideration, the assessee declared only interest of Rs. 1,94,055/- on FDRs and claimed expenditure of Rs. 10,38,27,023/-. To a further quer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness activities under the laws of India." 2.1 However, the AO did not accept the submissions of the assessee on the ground that the assessee itself conceded that main activities of the company for making investment in shares of ACEL was to acquire and retain control of the said company and, thus, the assessee did not carry on any business activity. In order to constitute a business activity, it must be with a motive of earning profit . While referring to decision of Hon'ble Delhi High Court in the case of Bharat Development (P.) Ltd. v. CIT [1982] 133 ITR 470, the AO observed that the action of the assessee company was not actuated by the profit motive but to earn dividend income only. Only one transaction of buying shares, although for taking controlling interest in the management of the company, did not constitute business for earning profit. Accordingly, the AO concluded that the said transaction of investment could not be regarded as carrying on the business for the purpose of section 28 of the Act. The AO further observed that the expenditure incurred for earning exempt dividend income is not allowable. Accordingly, while relying upon decisions in Everplus Security Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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 the 1st day of April, 2001." In view of the above provisions the allowance of expenditure in relation to dividend income would thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961 that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income the Income-tax Act." It is thus clear that provisions of section 14A will apply even when no exempt income has been earned. The Hon'ble Special Bench of ITAT New Delhi vide ITA No. 87/Dell2008 in the case of M/s Cheminvest Ltd. v. ITO - Del - SB has observed as under: "The language of subsection (1) of section 14A clearly provides that no deduction shall be allowed "in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n mat 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. " 46. In the result, the question, whether disallowance u/s. 14A of the I. T. Act can be made in a year in which no exempt income has been earned or received by the assessee, is answered affirmatively against the assessee and in favour of the Revenue". In the instant case the appellant has made only one investment during the year. There are no other transactions for purchase or sale of shares with the objects of business during the year. For investment to be a business proposition, the investment should be for the purpose of business carried on by the appellant during the year. No such business has been carried out by the appellant except the single investment made by the appellant during the previous year. The appellant has also accepted that the investment was made in shares of ACEL to acquire and retain control of the said company. This in itself does not const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Menon v. CIT [1959] 35 ITR 48 (SC); Nabadwip Chandra Roy v. CIT [1962] 44 ITR 591 (Assam); State of Madras v. G.J. Coelho [1964] 53 ITR 186 (SC).The ld. AR added that the expenditure incurred as a corporate entity to sustain itself, cannot be disallowed in terms of provision of section 14A of the Act and referred to decisions in CIT v. Apex Laboratories (P.) Ltd. [2010] 320 ITR 498 (Mad.); Addl. CIT v. Laxmi Agents (P.) Ltd. [1980] 125 ITR 227 (Guj); CIT v. Amritben R Shah [1999] 238 ITR 777, CIT v. Phil Corpn. Ltd., CIT v. Jardine Henderson Ltd. [1994] 210 ITR 981 and decision of Hon'ble Karnataka High Court in CCI Ltd. v. Jt. CIT. To a query by the Bench, the ld. AR admitted that besides the aforesaid investment in the company, no other investment was made in any other company in the year under consideration or in subsequent years. 5. On the other hand, the ld. DR supported the findings of ld. CIT(A) while contending that entire expenditure having been incurred for earning dividend income from investments in order to gain control in various companies is disallowable u/s 14A of the Act. Inter alia, the ld. DR relied upon the decision in Cheminvest Ltd. v. ITO [2009] 317 ITR (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unders, and decisions in Skinner v. Jack Breach Ltd. [1927] 2 KB 220 ; National Assn. of Local Government Officers v. Bolton Corpn. 1943 AC 166 and Aviation Shipping Co. Ltd. v. Murray (Inspector of Taxes) [1961] 2 All. ER 805 concluded that the word 'trade' may include all the connotations of the word 'business'. "Trade", as per the Webster's New Twentieth Century Dictionary (2nd edition), means amongst others, "a means of earning one's living, occupation or work. In Black's, Law Dictionary, trade means a business which a person has learnt or he carries on for procuring subsistence or profit; occupation or employment, etc. The meaning of "commerce" as given by the Concise Oxford Dictionary is "exchange of merchandise, specially on large scale". In ordinary parlance, trade, and commerce carry with them the idea of purchase and sale with a view to make profit. If a person buys goods with a view to sell them for profit, it is an ordinary case of trade. If the transactions are on a large scale it is called commerce. Nobody can define the volume, which would convert a trade into commerce. The word "business" is the broadest term and is encompasses trade, commerce and other activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " The observation of Rowlatt J. in Christopher Barker Sons v. IRC [1919] 2 KB 222, 228 (KB), "All professions are businesses, but all businesses are not professions .......... "also supports the view that professions are generally regarded as businesses. The same learned judge in another case, IRC v. Marine Steam Turbine Co. Ltd. [1920] 1 KB 193, 203 (KB) held: The word 'business', however, is also used in another and a very different sense, as meaning an active occupation or profession continuously carried on and it is in this sense that the word is used in the Act with which we are here concerned." The word "business" is one of wide import and it means an activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income. We are of the view that in the context in which the expression "business connection" is used in s. 9(1) of the Act, there is no warrant for giving a restricted meaning to it excluding "professional connections" from its scope." 6.3 In State of Andhra Pradesh v. H. Abdul Bakhi Bros. [1964] 15 STC 644, the Hon'ble Supreme Court elucidated that the expression "business" is an extensiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired. Where a person in the course of carrying on a business is required to dispose of what may be called his fixed assets or his discarded goods acquired in the course of the business, an inference that he desired to carry on the business of selling his fixed assets or discarded goods would not ordinarily arise. To infer from a course of transactions that it is intended thereby to carry on business ordinarily the characteristics of volume, frequency, continuity and regularity indicating an intention to continue the activity of carrying on the transactions must exist. But no test is decisive of the intention to carry on the business: in the light of all the circumstances an inference that a person desires to carry on the business of selling goods may be raised." 6.5 A similar view has been expressed in the Director of Supplies Disposal v. Member, Board of Revenue [1967] 20 STC 398 (SC) wherein it has been held:- "14. ...The expression "business" though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Bharat Development (P.) Ltd. (supra), wherein Hon'ble High Courts expressed the view that the term "business" means some real, substantive, systematic or organized course of activity or conduct capable of producing profit.; the term "profit motive" is not only the sole or relevant consideration that has to be kept in mind. It is one of the aspects. Normally intention to earn profit is required. The definition of the term "business" may also vary depending upon taxability under Sales Tax, Excise Duty, Value Added Tax, etc. because these are not taxes on income but the taxable event occurs because of the "economic activity" involved. Even if a person is carrying on trading on the principle of "no loss no profit", it may be liable to pay taxes or comply with the statute when the charge, or incidence of tax, is on the "economic activity" as recognized in Riverside Housing Association Ltd. v. Revenue Customs Commissioner [2006] EWHC 2383 (Ch) and the case law cited therein). In Town Investments Ltd. v. Department of the Environment [1977] 1 All ER 813, a Government department was claiming benefit under a legislation that protected "business tenancies" from increase in rent. The t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision or control of the business or operation of any company or undertaking and for that purpose to appoint and remunerate any directors, accountants or other experts or agents, fell within the scope of section 23A of the Indian Income-tax Act, 1922. Hon'ble Apex Court held that on the basis of the assets used, it could not be concluded that the assessee's business consisted "wholly or mainly" in the dealing in investments. It was observed that section 23A speaks of the business of "holding of investments" and when a person invests in the shares of some of the companies, it is difficult to say that his business is one of investing. In commercial circles investing is not considered as business. An investor may feel perplexed if he is called a businessman. Apparently, this decision was rendered in different contexts and settings and is ,thus not relevant. 6.8-1 In Rajeev Lochan Kanoria's case (supra) relied upon by the ld. AR, the Revenue did not challenge as perverse the finding of the Tribunal that the assessee's business activity consisted of acquiring shares for managing, controlling and rehabilitating different companies listed by the AO. Accordingly, it was concluded that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conduct; rather the assessee made sole investment of Rs. 1850.91 crores in purchase of shares of M/s Amubja Cement India Ltd. as concluded by the ld. CIT(A) no other transactions for purchase or sale of shares with the objects of business during the year were made nor the ld. AR referred us to any such transactions and instead the ld. AR admitted that the investment was made in shares of ACEL to acquire and retain control of the said company and no other transaction either in the preceding or succeeding years was made. Whether the sole transaction of investment was with the object of carrying on of business, no such material has been placed before us so as to enable us to infer so. In view of the foregoing, we are not inclined to interfere with the findings of the ld. CIT(A). Consequently, ground no.1.1 in the appeal is dismissed. 7. As regards grounds relating to disallowance u/s 14A of the Act, the AO disallowed the entire expenses Rs. 10,38,27,023/-, invoking provisions of section 14A(2) of the Act read with Rule 8D of I.T. Rules, 1962,without even analyzing the nature of each of the item of expenditure, comprising the aforesaid amount. The assessee merely submitted that exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the books of account or portions of documents which are relevant. The law casts a duty on the assessee to disclose fully and truly all material facts necessary for his assessment for that year. Not even a whisper has been made before us as to whether or not relevant accounts were placed before the AO or the ld. CIT(A) in order to enable them to examine the claim of the assessee. The ld. CIT(A) merely referred to decision in Cheminvest Ltd. (supra) without even examining the relevant accounts or ascertaining the relevant facts and circumstances. Here we may point out that Hon'ble jurisdictional High Court in Maxopp Investment Ltd. v. CIT held that expenditure (including interest paid on funds borrowed) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein is hit by section 14A inasmuch as the dividend received on such shares does not form part of the total income . 7.1 Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 while adjudicating a similar issue in the context of provisions of sec. 14A of the Act and Rule 8D of the IT Rules,1962 concluded that Rule 8D, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A. In section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing officer was free to adopt any reasonable and acceptable method. 42. Thus, the fact that we have held that sub-sections (2) (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt income, the entire expenditure incurred in relation to that business would have to be allowed even if a part of the income earned from the business is exempt from tax, section 14A of the Act was enacted to overcome those judicial pronouncements. The object of section14A of the Act is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income. 8. In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired. Mr. Khaitan strenuously contended before us that for the last few years before the relevant previous year, no new share has been acquired and thus, the loan that was taken and for which the interest is payable by the assessee was not for acquisition of those old shares and, therefore, the authorities below erred in law in giving benefit of proportionate deduction. 9. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of failure of the assessee to furnish relevant details/particulars and accounts while making the disallowance in terms of provisions of sec. 14A of the Act. There is nothing in the assessment order or impugned order as to whether the assessee placed the relevant details accounts before the AO nor the ld. CIT(A) seems to have undertaken any exercise to ascertain the details of expenditure objectively in managing and supervising the aforesaid huge investments. In view of the foregoing, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to the file of the AO for deciding the issue, afresh in accordance with law in the light of our aforesaid observations and various judicial pronouncements, including those referred to above, after allowing sufficient opportunity to the assessee Needless to say that while redeciding the issue, the AO shall pass a speaking order, giving reasons for his satisfaction or otherwise, as pointed out by the Hon'ble jurisdictional High Court in their decision in Maxopp Investment Ltd.'s case (supra), bringing out clearly expenditure incurred in managing and supervising the aforesaid huge investments. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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