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TMI Blog2010 (9) TMI 1183X X X X Extracts X X X X X X X X Extracts X X X X ..... ividend from shares of M/s. Dhampur Sugar Mills, but claimed it as exempt from total income offered for taxation. The AO asked the assessee to provide details of exempt income from dividend income alongwith details of expenses incurred on realizing dividend income. In compliance to that, the assessee submitted that any expenditure in respect of dividend income earned during the year had not been incurred. The contention of the assessee was examined by the AO with relevant audited books of account and other details. He did not accept the contention of the assessee by observing that the expenditure reflected in Profit and Loss Account under various heads envisaged the portion of expenditure incurred in relation to the income which was not directly attributable to any particular income or receipt. He, therefore, rejected the claim of the assessee that no expenditure had been incurred in relation to the dividend income. The AO made the disallowance of ₹ 13,91,511 by observing as under : the disallowance of proportionate expenses for earning of dividend income is calculated with formula as under : 1. A x B/C where A = Amount of average expenditure by way of Intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 under this Act.' Thus, the addition could have been made only in respect of the expenditure which had a relation to the income which did not form part of the total income during the year. However, the Ld. Addl. CIT has failed to establish the nexus of the expenditure incurred by the company with the exempted income (dividend) and has made an addition of ₹ 13,91,511 to the total income. The detailed break up of the expenses ₹ 13,91,511 disallowed is as under, as per the copy of the Profit Loss Account enclosed herewith: Salary Rs. 3,14,997 Interest Rs. 7,61,314 Repairs Rs. 54,588 Travelling Rs. 84,859 Postage Expenses Rs. 11,596 Stationery Rs. 9,498 Audit fee Rs. 7,857 Professional fee Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply to disallow the expenditure, if any, incurred in relation income which does not form part of total income. The interest paid during the year of ₹ 7,61,314 is on borrowings made in earlier years and the same has been always allowed as business expenses against income from rents, interest, and other incomes. These do not pertain to investments and shares. So far other expenses are concerned, these are normal administrative and statutory expenses and cannot have any relation to dividend income. Further, by making the addition on the basis of the formula, the Ld. Addl. CIT has made addition even in respect of those investments from which the appellant did not earn any income during the year which is beyond the legislative intention. 4. The ld.CIT(A), after considering the submissions of the assessee, observed that the assessee received income from dividends of ₹ 60,27,520 during the year out of investment in shares of Dhampur Sugar Mills Ltd. The investment involved was ₹ 15,46,74,008. According to the ld.CIT(A), the assessee did not have any other income which was taxable from the said investment and therefore, the precise quantum of expenditure in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the AO invoked the provisions of Section 14A of the Income-tax Act, 1961. The said provision reads as under : 14A. (1) 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8D was inserted by the IT (Fifth Amendment) Rules, 2008 by publication in the Gazette dt. 24th March, 2008. Sub-r. (2) of r.1 stipulates that the rules shall come into force from the date of their publication in the Official Gazette. This by itself is not conclusive. Secondly, prior to the insertion of s. 14A by the Finance Act of 2001 the Supreme Court had held in its decisions in CIT vs. Indian Bank Ltd. AIR 1965 SC 1473, CIT vs. Maharashtra Sugar Mills Ltd. 1973 CTR (SC) 489: (1971) 82 ITR 452 (SC):(1971) 3 SCC 543 and Rajasthan State Warehousing Corporation vs. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC) that in the case of a composite and indivisible business which resulted in taxable and non-taxable income, it was impermissible for the AO to apportion the expenditure incurred in relation to such business as between the earning of taxable and nontaxable income. Sub-sec. (1) of s. 14A was inserted with retrospective effect from 1st April, 1962 to overcome the decisions of the Supreme Court. At the same time, as has been noticed by the Supreme Court in its decision in CIT vs. Walfort Share Stock Brokers (P) Ltd. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC) 233, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not form part of the total income under the Act. Before the insertion of s. 14A, there was no specific method of determining the expenditure incurred in relation to nontaxable income. Looking at the totality of the circumstances, the measure of 0.5 per cent provided in r. 8D(2)(iii) is reasonable. Hence, while the method of computation provided in r. 8D is fair and reasonable to pass muster under Art. 14, the method must take effect prospectively. Finally, sub-sec. (4) of S. 295 empowers the rule-making authority to give retrospective effect to subordinate legislation. However, unless expressly or by necessary implication, a contrary provision is made, no retrospective effect is to be given to any rule so as to prejudicially affect the interests of the assessee. Even in the absence of sub-ss. (2) and (3) of S. 14A and of r. 8D, the AO was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub-s. (1) of S. 14A which provide that no deduction would be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. The change which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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